Wednesday, 18 July 2018

Japan 2007: A warrior to reckon with

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NikkoCiti smashed all records with the issuance of a ¥415bn joint Samurai and global bond in June at the peak of the Samurai fever before the global credit crisis struck. Since then, the firm had established itself as a force to reckon with by reopening the yen bond market in September with a ¥250bn global issue, writes Han Nee Tay.

To say that NikkoCiti’s ¥415bn (US$3.2bn) deal in June was a landmark transaction is an understatement. The Samurai portion of the deal was the largest of its kind and the largest ever for Citi in any currency, marking the importance of the Japanese market for the firm.

Fixed income co-head Brian Mccappin said more jumbo deals could follow.

“The Japanese market is extremely important for Citi in almost every area of business but also as part of its global funding,” Mccappin said. “Clearly with the Nikko partnership, Citi is striving to become an ever more integral and local part of the Japanese financial landscape. It is likely that as the Citi brand, in partnership with Nikko, becomes more trusted in Japan, larger funding opportunities could follow. Therefore we hope that Citi can increasingly support growing Japanese demand as its business develops in Japan.”

The Samurai deal hit the market in six tranches, while the global bond was made of three. All tranches priced at or near the tight end of guidance, according to Mccappin. The three-year fixed and floating came in at Libor plus 6bp, while the five-year fixed and floating at Libor plus 11bp, the seven-year at Libor plus 17bp and the 10-year fixed at Libor plus 20bp.

The global part of the deal comprised a 20-year fixed at Libor plus 24bp, the 30-year fixed at Libor plus 30bp and the 40-year fixed at Libor plus 32bp. Setting out with different tranches allowed NikkoCiti to tap different investor groups.

“A lot of life insurance and pension money look at 10 years, while a lot of regional bank money looks at the five-year floaters,” said Mccappin. “There are a lot of major banks and second-tier city banks that look at the five-year fixeds. There are distinct client groups that huddle around certain maturities, so you typically find a lot of tranches in a Samurai deal, whereas in a US market you wouldn’t have that.”

Rival bankers said that the deal helped Citigroup to establish its distribution franchise in Japan. “Citigroup would say that they already have distribution through Nikko but really, the deal gave them an opportunity to go out and look for investors at all levels,” said a banker away from the transaction.

Mccappin said, however, that the deal reflected the strength of the distribution network that the investment bank already had in Japan. “Rather than boost the distribution, we drew on it,” he said. “The market dynamics were fantastic, people were looking at bonds across all these different maturities but we didn’t so much boost the distribution as highlight how good it was.”

Co-leads of the deal were Mizuho Securities, Daiwa Securities, Mitsubishi UFJ Securities and Nomura Securities.

A Citi spokesman had told IFR at the time of the issuance that had the deal not come in June, it would have tapped the market in September, due to timing issues around the its tender offer for Nikko Cordial Securities. If the deal had not been completed then, NikkoCiti would have found itself in a much more hostile environment in the third quarter. But Mccappin said that favourable market sentiment then meant the deal flew off the shelf.

“The first half of the year was an extremely buoyant time for issuers and an extremely comfortable time for underwriters,” he said. “We had a very wide range of global names coming to the Samurai market, of a wider geographic and rating variety than we’d seen for a long time.”

Perhaps as testimony to NikkoCiti’s ability to lead the market, it became the first to issue in September with a ¥250bn global bond. The five-year floating note priced at Libor over 45bp, which while substantially wider, showed that NikkoCiti had gauged the market well as subsequent yen deals from Deutsche Bank, Bank of America and Royal Bank of Scotland priced at similar levels.

“At that time, that was a good funding level versus where they were able to issue dollar bonds in the US market,” said Duncan Phillips of the syndicate desk.

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