Pinball Parlors Shake Up Japan's Biggest Leisure Industry
Operators of ``pachinko'' halls such as Gaia Co. and Daiei Com. are using asset-backed bonds to pay for new machines and venues to reverse a decade-long decline in the nation's biggest leisure industry.
Pachinko parlors lost 11 million players, 40 percent of their clientele, in the decade through 2005 as the country stumbled from one recession to another. Now, encouraged by the fastest annual growth in 15 years, companies such as Gaia and Kyoto-based Maruhan Corp., the biggest operator, are trying to win back customers with new venues, squeezing out smaller rivals.
The pachinko industry ``is in the midst of a shake-out,'' said Shinsei Bank Ltd. General Manager Ichiro Masuda. ``Stronger operators are adding bigger amenities and selling bonds backed by revenue, giving them access to larger pools of cash than can be obtained through bank borrowings.''
Shinsei Bank and Merrill Lynch & Co. plan to arrange as much as 160 billion yen of asset-backed debt for pachinko companies.
Pachinko is a Japanese version of pinball in which the player seeks to amass piles of small, steel balls that can then be exchanged for prizes. Under Japanese law, cash cannot be paid out on the premises, but there is usually a small booth located nearby where players can exchange their prizes for money.
Gaia, Japan's third-largest pachinko hall operator with 170 outlets, plans to use proceeds from asset-backed bonds to buy real estate, build more outlets and replace its pinball machines, said Kenji Sawada, 50, general treasury manager.
`Handful' Will Survive
Tokyo-based Gaia added 53 parlors in 2005 to expand its share in a market that hasn't grown in more than a decade. The total number of pachinko parlors in Japan fell for the 10th straight year in 2005 to 15,165 from 15,617, according to Zennichiyuren, a pachinko hall association in Japan. The average number of game machines per hall rose to 323 from 260 ten years ago, as stronger operators built bigger halls to attract customers.
``There will be only a handful of operators in the near future, dominating most of the market'' said Gaia's Sawada. The December deal was Japan's first disclosed sale of debt backed by a pachinko business. This type of fundraising will ``make a big difference in the reshuffle,'' he said.
The industry's huge revenue is attracting banks looking for new business.
Shinsei Bank, the first Japanese lender bought by overseas investors, has started giving loans to pachinko operators and plans to repackage them into bonds worth 50 billion to 100 billion yen backed by takings from parlors, said Yoshitaka Hata, chief operating officer at Shinsei's securities unit. Merrill has similar plans.
Shinsei arranged 23 billion yen of financing for Daiei in December, Masuda said. The bank plans to segregate operating cash flow from Daiei's 16 parlors for asset-backed bonds.
``Pachinko halls, with their abundant cash, are a promising target as asset-backed bonds for consumer lenders become a mature product in Japan,'' Jun Mihara, a Tokyo-based managing director at Merrill Lynch, said in an interview last month.
Merrill and Shinsei follow Deutsche Bank AG, which arranged a 70 billion-yen asset-backed security for Gaia in December.
The reviving fortunes of pachinko halls are illustrated by Maruhan, the biggest with 190 sites and 8,428 staff. Maruhan's sales rose 28 percent to 1.6 trillion yen in the year ended March 31, according to data on its Web site. The company is run by Chairman Han Chang-Woo, 75, who came to Japan from Korea after the war and set up the business in 1957.
Still, investors in the industry face risks.
The number of pachinko players dropped 40 percent to 18 million in 2005 from 29 million in 1995, according to Japan's Productivity Center for Socio-Economic Development. The industry's total revenue dropped 4.6 percent to 29.5 trillion yen in the same period.
As the big operators fund expansion, smaller players are losing out. Osaka Bussan Co., an operator of eight pachinko halls, failed in November with 6.8 billion yen of debt. Space Value Co., an operator in Chiba Prefecture, has applied to creditors for time to restructure the company, according to Teikoku Databank Ltd., a Tokyo-based researcher.
The gaming halls have also suffered a wave of bad publicity over tax evasion and their system of payouts.
Bars, pachinko halls and processors of industrial waste were the worst three industries in terms of frequent tax evasion, the National Tax Agency said in November. The cash redemption policy is one of the industry's biggest problems, given that it is technically illegal, said economist Takashi Kadokura at BRICs Research Institute in Japan's Yokosuka City.
``The pachinko industry's structural problems may accelerate the customer drain,'' said Kadokura, adding that the industry needed to modernize and erase negative publicity.
Japanese law only allows people to bet cash at government- managed gambling facilities such as horse-racing, bicycling and power-boat events. Pachinko parlors also aren't traded on the nation's stock exchanges, limiting the amount of information available about their finances.