PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP
FUKOKU SEIMEI BUILDING, 2-2 UCHISAIWAICHO 2-CHOME, CHIYODA-KU,
TOKYO 100-0011, JAPAN
TELEPHONE (813) 3597-8101 FACSIMILE (813) 3597-8120
February 28, 2006
VIA EDGAR
U.S. Securities and Exchange Commission
100 F Street, NE
Washington DC, 20002, USA
Attention: Ms. Joyce Sweeney
Accounting Branch Chief
MITSUBISHI UFJ FINANCIAL GROUP, INC.
FORM 20-F FOR FISCAL YEAR ENDED MARCH 31, 2005
----------------------------------------------
Dear Ms. Sweeney:
We are submitting this letter on behalf of our client,
Mitsubishi UFJ Financial Group, Inc. (the "Registrant"). We appreciate the
Staff's accounting review of the Registrant's previous annual report on Form
20-F for the fiscal year ended March 31, 2005 (the "Form 20-F"), and the
Staff's comments with respect to applicable disclosure requirements and
enhanced disclosure in the Registrant's future filings.
Set forth below are the comments of the Staff transmitted in
your letter dated February 23, 2006 together with the Registrant's responses
to those comments.
CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - INVESTMENT SECURITIES, PAGE F-25
COMMENT NO. 1. We note your disclosure on page 59 that as part of the business
revitalization plan of Mitsubishi Motors, Bank of Tokyo-Mitsubishi and
Mitsubishi Trust Bank purchased common and preferred shares of Mitsubishi
Motors, including amounts related to a debt-for-equity swap. Please tell us
and in future filings disclose the following regarding these transactions:
o the terms and carrying amount of debt swapped for equity;
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o how the equity investments are carried on your balance sheet
(i.e. fair market value or cost); and
o specifically how you presented these transactions in your
Statements of Cash Flows.
RESPONSE TO COMMENT NO. 1. The Registrant has advised us
that in connection with the business revitalization plan of Mitsubishi Motors
Corporation ("MMC") announced in May 2004, The Bank of Tokyo-Mitsubishi Ltd.
("Bank of Tokyo-Mitsubishi") and The Mitsubishi Trust and Banking Corporation
("Mitsubishi Trust Bank") subscribed for MMC preferred shares in June 2004
through a debt-for-equity swap relating to (Y)130 billion aggregate principal
amount of loans previously extended to MMC. In addition, in connection with a
new business revitalization plan of MMC announced in January 2005, Bank of
Tokyo-Mitsubishi subscribed for additional MMC preferred shares through a
debt-for-equity swap relating to (Y)54 billion aggregate principal amount of
loans on March 10, 2005, and Mitsubishi Trust Bank also subscribed for
additional MMC preferred shares through a debt-for-equity swap relating to
(Y)10.2 billion aggregate principal amount of loans on March 22, 2005.
Prior to the debt-for-equity swap transactions described
above, the Registrant had extended to MMC and its subsidiaries several
commercial loans under standard terms available to similarly situated
corporate borrowers. The Registrant provided allowance for credit losses with
respect to the loans extended to MMC and its subsidiaries in accordance with
its general loan valuation allowance policy described in the Form 20-F.
In connection with each of the three debt-for-equity swap
transactions described above, the Registrant received the MMC preferred shares
in full satisfaction of the relevant commercial loans that were subject to the
debt-for-equity swap transaction. On the dates of the debt-for-equity swap
transactions, the Registrant recorded the MMC preferred shares as "Other
investments securities" on the Registrant's consolidated balance sheet at fair
value. In determining fair value, the Registrant utilized the fair value of
the loans swapped because such value was more clearly evident than the fair
value of the MMC preferred shares received, in accordance with SFAS 15,
paragraph 28, footnote 16. The Registrant determined that the fair value of
the loans subject to the debt-for-equity swap transaction was more clearly
evident than the fair value of the MMC preferred shares received at the time
of transaction due to the following factors:
o The MMC preferred shares are not traded publicly and the market
price of the MMC preferred shares is not observable. In
addition, the MMC preferred shares were issued specifically for
the debt-for-equity swap transaction and there are no comparable
instruments that the Registrant can look to in the market place.
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o At the time of the debt restructuring, it was impracticable to
determine the amounts of future cash flows from the borrower
with a sufficient level of certainty, as is often the case for
debt restructurings, because MMC's restructuring was at a very
preliminary stage. As a result, a discounted cash flow method
was viewed as inappropriate to provide a meaningful and
practicable basis for valuing the MMC preferred shares.
o On the other hand, the fair value of the loans was more clearly
and reasonably determinable based on the Registrant's credit
monitoring procedures and methodology for measuring its loan
valuation allowance.
The Registrant recorded the MMC preferred shares received at
the fair value of the loans swapped, which was equal to the aggregate carrying
amount of the loans, net of allowance. Accordingly, the Registrant did not
recognize any gain or loss for the period with respect to the debt-for-equity
swap transactions.
Subsequent to the debt-for-equity swap transactions, the
Registrant has accounted for the MMC preferred shares at cost in accordance
with Accounting Principles Board No. 18 (APB 18). Additionally, the Registrant
periodically reviews the MMC preferred shares for possible impairment in
accordance with APB 18. For purposes of periodic impairment testing, the
Registrant typically utilizes various commonly-accepted option valuation
models to determine the fair value of non-marketable investment securities,
including the MMC preferred shares. For example, the Registrant's major
banking subsidiary, Bank of Tokyo-Mitsubishi UFJ, applies the Monis
convertibles pricing model (which the Registrant believes is commonly used to
value non-marketable convertible securities). This valuation model takes into
account a number of factors, including the price of the underlying common
stock, volatility and dividend payments, and computes the value of the
convertible securities using trinomial trees.
The Registrant recorded the debt-for-equity swaps as cash
transactions - (1) collections of loans and (2) purchases of preferred shares,
reflecting the fact that cash changed hands between the two parties.
Accordingly, the Registrant presented these transactions as "Decrease in
loans" and "Purchases of other investment securities" in the its consolidated
statement of cash flows.
The Registrant intends to revise the disclosure as requested
in its future filings, and intends to disclose the aggregate carrying amount
of debt swapped for equity, including transactions with borrowers other than
MMC, in the form of Appendix 1 attached to this letter.
The Registrant believes the carrying amount of loans, net of
allowance, which the Registrant intends to disclose in the form of Appendix 1
generally reflects the fair value of the loans subject to the debt-for-equity
transactions. Typically, the
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Registrant provides allowance for credit losses based on management's estimate
of probable losses on loans in accordance with SFAS 114. In particular, when a
large-balance, non-homogeneous loan has been individually determined to be
impaired, the Registrant evaluates such loan individually and provides an
allocated allowance for such specifically identified problem loan by using
various techniques, including the fair value of collateral, to estimate the
losses. When the Registrant determines that real estate collateral should
serve as the basis for determining the carrying amount of a loan, the
Registrant will conduct in-house valuation of such real estate collateral
utilizing various pricing methods. In certain prescribed circumstances, such
as when the real estate collateral is estimated to have a value of (Y)5
billion or more, the Registrant will be required to obtain an independent
appraisal of the real estate. Until March 2005, the Registrant typically
valued its collateral-dependent loans at 90% of the appraisal value of the
underlying real estate collateral.(1) Since April 2005, the Registrant has
recorded the full appraisal value of the underlying real estate collateral as
the fair value of a loan because of the general increase in real estate prices
in Japan.
NOTE 6 - LOANS
LOAN SECURITIZATION, PAGE F-34
COMMENT NO. 2. We note your disclosure that you did not possess any retained
interests associated with your mortgage loan securitizations at March 31, 2005.
We also note that you provide servicing and advancing line for loans transferred
to the trust. Please tell us the following regarding your securitizations:
o the nature and terms of the securitization transactions;
o the gross and carrying amount of servicing asset or liability
recorded resulting from your obligation to service the
transferred loans; and
o describe how you provide an advancing line for loans transferred
to the trust.
RESPONSE TO COMMENT NO. 2. The Registrant has advised us as
follows:
NATURE AND TERMS OF THE SECURITIZATION TRANSACTIONS. The
securitization transactions referred to in Note 6 on page F-34 relate to the
issuance of commercial mortgage-backed securities. In these transactions, the
Registrant transferred its non-recourse mortgage loans to a trust account.
This transfer was accounted for as a sale, because the transfer satisfies the
sale accounting criteria defined in paragraph 9 of SFAS 140, as follows:
- ------------
(1) Between 1999 and 2005, the ratio of foreclosure sale price to appraisal
value has ranged between 90% and 100%.
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o The transferred loans have been legally isolated from the
Registrant.
o The trust, the transferee of loans, has a fully ownership right
of the transferred loans.
o The Registrant does not maintain effective control over the
transferred loans as there is no agreement that both entitles
and obligates the Registrant to repurchase or redeem transferred
loans and/or that entitle the transferor to unilaterally cause
the trust to return transferred assets.
In exchange for the transfer of the loans, the Registrant
receives five classes of beneficial interests, all of which were sold to the
outside investors. After the transfer, the Registrant engages in a servicing
activity of the loan under a master servicing agreement and provides an
advancing line to the trust account. However, special servicing, when
necessary, is to be provided by a third party servicer.
The five classes of beneficial interests are: Class A, Class
B, Class C, Class D and Class X. Class X is an interest-only beneficial
interest and no principal amount is set. Other classes have principal of
(Y)6,100 million, (Y)1,200 million, (Y)900 million and (Y)266 million,
respectively. Dividends to Class A and Class X are secured by the advancing
line that the Registrant provides. The principal payment is to be made with
the priority from Class A, Class B, Class C to Class D.
SERVICING ASSET/LIABILITY. In the Registrant's financial
statements, the Registrant recorded no servicing asset/liability for the
transfer. The Registrant engages in the master servicing activity with the
compensation being a fee commensurate with those on similar servicing
transactions. Further, the Registrant believes no significant amount of
servicing assets and/or liabilities are to be recognized from the transactions
as the maximum servicing fee throughout the total servicing period is
estimated to be (Y)2 million based on the annual servicing fees of 0.005%
applied to the outstanding loans of (Y)8,466 million, with the maximum
residual loan term being four years plus several months.
ADVANCING LINE. An advancing line is provided to the trust
only to adjust the timing difference of loan repayments from loan obligors to
the trust account and the payment stream of dividends to the beneficiaries, in
case that the delay of the interest repayment from debtors causes a shortage
of funds to pay dividends to the holder of Class A and Class X beneficial
interests. Advances are provided on the condition that the Registrant has no
suspicion of the future repayment of advance.
NOTE 10 - INCOME TAXES, PAGE F-38
COMMENT NO. 3. We note your disclosure on page F-41 that you recorded
reductions to your deferred tax valuation allowance for fiscal years ended
March 31, 2004 and 2005
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which primarily reflected a decrease of operating loss carryforwards of your
domestic subsidiaries. Please tell us and in future filings disclose why there
was a decrease of operating loss carryforwards and how you determined the
amount of your deferred tax valuation allowance as of March 31, 2004 and March
31, 2005. In your analysis, please describe how the March 2004 extension of
the period for operating loss carryforwards from 5 to 7 years impacted your
analysis. Refer to paragraphs 20 - 26 of SFAS 109.
RESPONSE TO COMMENT NO. 3. The Registrant has advised us
that the operating loss carryforwards ("NOL") decreased primarily because they
were utilized as the Registrant and its subsidiaries earned taxable income for
the fiscal year ended March 31, 2004 and 2005. The operating loss
carryforwards which expired unused was less than 5% of the NOL balances as of
March 31, 2004 and 2005.
The Registrant disclosed the following in the Form 20-F
under "Item 5. Operating and Financial Review and Prospects-Critical
Accounting Estimates-Valuation of Deferred Tax Assets":
"In determining a valuation allowance, we perform a review of future
taxable income (exclusive of reversing temporary differences and
carryforwards) and future reversals of existing taxable temporary
differences."
As such, taxable income was estimated for each subsidiary to
determine whether deferred tax assets were more likely than not to be utilized
in foreseeable future periods, using forecasted operating results, based on
recent historical trends and approved business plans, the eligible
carryforward periods and other relevant factors.
In March 2004, the Japanese government extended the period
for operating loss carryforwards from five years to seven years under the
corporate tax law. However, this extension of the carryforward period did not
materially impact the amount of the valuation allowance as of March 31, 2004
and 2005, because the extension is only applicable retroactively to operating
loss carryforwards incurred in or after fiscal years beginning April 1, 2001,
while all of the Registrant's NOLs recorded beginning April 1, 2001 were
expected to be realized within five years or not to be realized at all,
regardless of the extended carryforward period.
Based on the analysis above, the Registrant intends to
include the following disclosure in its financial statements for the fiscal
year ending March 31, 2006 (modified as appropriate to reflect the situation
at year-end):
"The valuation allowance was provided primarily against deferred tax
assets recorded at MTFG Group's subsidiaries with operating loss
carryforwards. The amount of the valuation allowance is determined
based on our review of future taxable income (exclusive of reversing
temporary differences and carryforwards) and future reversals of
existing taxable temporary differences. Future taxable
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income is developed from forecasted operating results, based on
recent historical trends and approved business plans, the eligible
carryforward periods and other relevant factors. For certain
subsidiaries with strong negative evidences such as existence of
significant amount of operating loss carryforwards and cumulative
losses in recent years, a valuation allowance was recognized against
the deferred tax assets as of March 31, 2004 and 2005 to the extent
that it is more likely than not that they will not be realized. The
net changes in the valuation allowance for deferred income tax assets
were decreases of (Y)184,906 million and (Y)20,848 million for the
fiscal years ended March 31, 2004 and 2005, respectively, which
primarily reflected the realization of such operating loss
carryforwards of certain subsidiaries corresponding to
better-than-expected taxable income before deducting carryforwards."
NOTE 24 - DERIVATIVE FINANCIAL INSTRUMENTS, PAGE F-74
COMMENT NO. 4. For each type of hedged item, separately by fair value hedge or
cash flow hedge, please tell us how you determined that the relationship met
the criteria for hedge accounting pursuant to paragraphs 20, 21, 28 and 29 of
SFAS 133. Specifically address the following:
o the nature and terms of the hedged item and derivative
instrument;
o the specific identified risk being hedged; and
o the quantitative measures you use to assess effectiveness of
each hedge both at inception and on an ongoing basis.
RESPONSE TO COMMENT NO. 4. The Registrant has advised us
that Bank of Tokyo-Mitsubishi and Mitsubishi Trust Bank, the Registrant's two
major domestic subsidiaries, do not utilize hedge accounting. UnionBanCal
Corporation ("UNBC"), the Registrant's U.S. subsidiary, however, applies hedge
accounting as disclosed in the Registrant's financial statements. Based on the
notional contract amounts, the Registrant believes the hedging transactions,
into which UNBC enters (which account for less than 1% of the total notional
contract amounts), is not material in the context of Registrant's consolidated
financial statements.
The following is a brief summary of UNBC's risk management
process and the applicable criteria for hedge accounting for each hedging
strategy:
o Fair Value Hedging - Hedging Strategy for Medium Term Notes:
UNBC engages in an interest rate hedging strategy in which an
interest rate swap is associated with a specified interest
bearing liability (UNBC's five-year, medium-term debt issuance)
in order to convert the liability from a fixed rate to a
floating rate instrument. This strategy mitigates the changes in
fair value of the hedged liability caused by changes in the
designated benchmark interest rate, U.S. dollar LIBOR. The fair
value hedging transaction for the medium-term notes was
structured at inception to mirror all of the provisions of the
medium-term notes, which allows UNBC to assume that no
ineffectiveness exists. There are no other terms in the hedged
item that cannot be mirrored in the hedging instrument that
would invalidate the assumption of no ineffectiveness.
o Fair Value Hedging - Hedging Strategy for Subordinated Notes:
UNBC engages in an interest rate hedging strategy in which an
interest rate swap is associated with a specified interest
bearing liability (UNBC's ten-year, subordinated debt issuance)
in order to convert the liability from a fixed rate
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to a floating rate instrument. This strategy mitigates the
changes in fair value of the hedged liability caused by changes
in the designated benchmark interest rate, U.S. dollar LIBOR.
The fair value hedging transaction for the subordinated debt was
structured at inception to mirror all of the provisions of the
subordinated debt, which allows UNBC to assume that no
ineffectiveness exists.
o Fair Value Hedging - Hedging Strategy for MarketPath
Certificates of Deposit: UNBC engages in a hedging strategy in
which interest bearing certificates of deposit, which are tied
to the changes in the Standard and Poor's 500 index, are
exchanged for a fixed rate of interest. UNBC accounts for the
embedded derivative in the certificates of deposit at fair
value. A total return swap that encompasses the value of a
series of options that had individually hedged each individual
certificate of deposit is valued at fair value. Since each
individual certificate of deposit is hedged with a specific
individual option contract, no ineffectiveness can exist. These
MarketPath certificates of deposit were acquired as part of the
acquisition of Jackson National Bank in October 2004. Subsequent
to the acquisition, UNBC no longer offers this product.
o Cash Flow Hedging - Hedging Strategies for Variable Rate Loans
and Certificates of Deposit: As discussed in the response to
comment no. 6 below, UNBC enters into cash flow hedging
relationships to address the variability in forecasted interest
cash flows on LIBOR based loans and on the forecasted issuance
and rollover of short-term deposits. See the response to comment
no. 6 for further discussion of these hedged items and the
nature of the risk being hedged. In these hedging relationships,
UNBC uses a variety of hedging instruments including interest
rate swaps, floors, caps, corridor or collars. All option
contracts used are either net purchased options or zero cost
collars. The reset tenor of the hedges ranges from 1 to 6 month
LIBOR and generally mature in less than 3 years. The period of
the hedged forecasted interest
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payments is equal to the term of the associated derivatives. The
loans and deposits have reset frequencies or tenors that
generally match the reset frequency of the hedging instruments.
At inception and on an ongoing basis, UNBC determines the
effectiveness of the hedging relationships using regression
analysis to demonstrate the degree of effectiveness that exists.
This regression analysis examines the differences in reset dates
and reset tenors that may exist between the hedging instruments
and the hedged items. The key regression outputs that are
analyzed in assessing effectiveness include R squared, slope, t
and F statistics. UNBC updates this regression analysis
quarterly in order to justify the continuing use of hedge
accounting on these kinds of hedges and would discontinue hedge
accounting in the event that the test has failed.
Ineffectiveness is measured using the hypothetical derivative
method. For hedging relationships involving options, UNBC
applies the guidance in DIG Issue G20 and therefore bases its
assessment of effectiveness on the terminal value of such
instruments, and accordingly includes total changes in fair
value (time and intrinsic) in the assessment of hedge
effectiveness.
COMMENT NO. 5. Please tell us whether you use the short-cut method or matched
terms for assuming no hedge ineffectiveness to qualify any of your hedging
relationships for hedge accounting treatment under SFAS 133. If so, please
tell us for each hedging relationship how you determine that the hedging
relationship meets each of the conditions in paragraph 65 or 68 of SFAS 133.
RESPONSE TO COMMENT NO. 5. As discussed above, the
Registrant's two major domestic subsidiaries, Bank of Tokyo-Mitsubishi and
Mitsubishi Trust Bank, do not utilize hedge accounting. The Registrant has
advised us that UNBC uses the shortcut method to hedge the changes in fair
value of two debt instruments: UNBC's $200 million medium-term notes with a
fixed rate of 5.75% and UNBC's $400 million subordinated notes with a fixed
rate of 5.25%. The methodology for qualifying for the shortcut method is the
same. At inception, the notional amount of the interest rate swaps matched the
principal amount of the liabilities, the fair value of the interest rate swaps
were zero, the net settlements for both the swap and the debt were identical,
the debt and the swaps are not prepayable, the variable legs of the swaps are
matched to the benchmark interest rate of the debt and there are no other
terms in either the debt or the swaps that would invalidate the assumption of
no ineffectiveness.
COMMENT NO. 6. Please tell us whether you aggregate similar assets and
liabilities and hedge as a portfolio. If so, provide us with a comprehensive
analysis explaining how you apply SFAS 133 Implementation Issue F11 to these
hedging relationships.
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RESPONSE TO COMMENT NO. 6. The Registrant has advised us
that it does not have any fair value hedge relationships in which it
aggregates similar assets or liabilities and hedge them as a portfolio.
Accordingly, the provisions of paragraph SFAS 133 Implementation Issue F11,
and paragraph 21(a)(1) of SFAS 133 do not apply. Several of UNBC's cash flow
hedging relationships involve the aggregation of individual transactions as
follows:
o UNBC's cash flow hedges of forecasted interest payments on LIBOR
based loans (see the response to comment no. 4) all involve
commercial loans that are explicitly indexed to LIBOR, which is
identified as the benchmark interest rate and the risk being
hedged for all such hedging relationships. As such, UNBC has
determined that all hedged items grouped in this manner meet the
criteria set forth in paragraphs 29(a) and 462 of SFAS 133, as
their contractual cash flows are based on the same index.
o UNBC's cash flow hedges of forecasted interest payments on the
forecasted issuance and rollover of short-term time certificates
of deposits (see the response to comment no. 4) all involve
short-term fixed rate time certificates of deposits for which
the risk exposure being hedged is the variability in interest
cash flows attributable to changes in benchmark interest rates,
which is designated as LIBOR. As such, UNBC has determined that
all hedged items grouped in this manner meet the criteria set
forth in paragraphs 29(a) and 462 of SFAS 133, as the risk
exposure for each item is based on LIBOR.
* * *
In connection with responding to the comments of the Staff,
the Registrant acknowledges that:
o the Registrant is responsible for the adequacy and accuracy of
the disclosure in the filings;
o staff comments or changes to disclosure in response to staff
comments do not foreclose the Commission from taking any action
with respect to the filings; and
o the Registrant may not assert staff comments as a defense in any
proceeding initiated by the Commission or any person under the
federal securities laws of the United States.
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Please contact the undersigned at +81-3-3597-8101 (fax
number +81-3-3597-8120) if we may be of help in answering any questions that
may arise in connection with your review of this letter.
Sincerely,
/s/ Tong Yu
-----------------------
Tong Yu
cc: Donald A. Walker
Sharon M. Blume
U.S. SECURITIES AND EXCHANGE COMMISSION
Mitsubishi UFJ Financial Group, Inc.
U.S. Securities and Exchange Commission 12
APPENDIX 1
We restructured certain debt by entering into debt-for-equity swap transactions.
As a result of these debt-for-equity swap transactions, our loans to some
borrowers were effectively converted into equity interests in the borrowers,
often in a form of preferred shares.
The aggregate carrying amount of debt swapped for equity, net of allowance, for
the fiscal years ended March 31, 2003, 2004 and 2005 was as follows:
FISCAL YEARS ENDED MARCH 31,
-----------------------------------------------------------
2003 2004 2005
-----------------------------------------------------------
(IN BILLIONS)
(Yen) 18.1 (Yen) 59.4 (Yen) 76.8
Such loans were often identified as impaired and, accordingly, the
debt-for-equity swap transactions did not materially affect our net income in
the periods in which the restructuring took place.
Equity interests acquired through a debt-for-equity swap transaction are
accounted for as other investments and carried at cost on our consolidated
balance sheet, and reviewed for impairment periodically.
Due to regulatory and legal reasons, cash often changes hands between the
parties to the debt-for-equity swap transactions. In such cases, the
debt-for-equity swap is classified as cash transactions in our statement of
cash flows as repayments of loans and purchases of other investment
securities.