Japanese ECM Roundtable 2010: Part I
IFR: Let’s start by setting the general scene for our discussion today; I wanted to pick up on general market sentiment here in Japan. Clearly there’s been severe market dislocation globally, we’ve seen volatility in Europe; we’ve seen prices moving very wildly. How is that impacting on sentiment here in Japan? Shinohara-san, do you want to give us some general thoughts about how you see the market?
Minoru Shinohara (MS), Nomura: For equity and equity related products, I don’t think that the Greek situation has changed the picture so much. I think there’s been a huge trend since the financial crisis of 2008 that’s focused on strengthening balance sheets and following the strategic movement of management to back up the financing off that. There’ve been quite a lot of capital increases in the markets. I think last year was quite a year. And that will continue. I think there will be a focus on how funding will be used, and on equity stories. The flight to quality on the equity side will continue.
IFR: So relatively optimistic.
MS: Yes, reasonably positive.
IFR: Do you share that view,Otsuka-san?
Yoshifumi Otsuka (YO), Daiwa: Yes for the time being. At the moment, the market is very shaky because of the fluctuation of the currency; the Japanese market and Japanese corporates are very much affected by currency movements. But the general trend of the recovery and the earnings of Japanese corporates are fine so far. So I share Shinohara’s view and am in general optimistic.
IFR: So two optimistic views. But the Japanese economy is not particularly performing well and the outlook is not hugely rosy. Do you think the market is perhaps getting ahead of itself in terms of optimism, Doug?
Doug Howland (DH), JP Morgan: Certainly on a relative basis, I agree with your point, that Japan still doesn’t look that exciting on medium to long-term view. But having said that, in the last month we’ve actually seen not just Japanese equity funds, but probably more interestingly the big global funds that have been extremely underweight Japan in the last three years, actually starting to shift their holdings away from Europe in particular into Japan. So on a relative basis, Japan looks fairly attractive right now.The perception is that Japanese management have historically probably been a bit more conservative in the use of the balance sheet, and have had less leverage etc, and of course there’s also the attraction of the currency. You know, at the moment it appears that the US dollar and yen are the two currencies that people move to – away from euro in particular and to a lesser extent sterling. So in a funny way, Japan not really moving much at all is benefiting because Europe is obviously having some structural issues right now. And that is meaning people are putting some more money over to Japan.
IFR: Kusunose-san, do you share the general view that things are looking pretty good? What are your expectations? What are the key elements for you going forward six months or a year that may affect sentiment here?
Takeo Kusunose (TK), Bank of America Merrill Lynch: First of all, all of the guys here are in equity capital markets so are always optimistic; it’s a great way to pitch to clients! But there have been quite a lot of things happening in EMEA in the past year: the financial crisis, the Icelandic volcano, issues with Greece and so on. So the factor that we should seriously consider is the linkage of global events and how they affect the Japanese market. That’s a real uncertainty and there are a lot of things happening that were beyond our expectations.But I’m optimistic, for the rest of the year. I’m not a strategist or a forecaster so cannot predict what will happen in six months. But based on discussions with our clients, they see a bottoming out of their businesses and concerns. Therefore, fundamentally, specifically in Japan, I guess the next six months are looking OK. But I stress again that there’s a lot of uncertainty around world events and this is a key factor to take into consideration.
IFR: Ito-san; from where you sit at the Tokyo Stock Exchange, you’re in charge of listings and are focusing on corporate governance. Do you share the general view that’s been expressed so far?
Masao Ito (MI), Tokyo Stock Exchange: From the viewpoint of Asia, the Chinese stock market and other Asian markets have grown rapidly. Even though Japan is an established financial centre, maintaining good corporate governance of listed companies is one of the vital elements towards maintaining the quality of capital markets and is a big focus for the Tokyo Stock Exchange.
IFR: The issue of corporate governance has come up a lot in the last two years, mainly because there’s been so much poor corporate governance around the world. What is the TSE doing to strengthen corporate governance in Japan?
MI: The Tokyo Stock Exchange has put a high priority on enhancing corporate governance of listed companies. In accordance with our policies, some of the TSE listing rules were revised last year in order to establish a monitoring system for the management of listed companies to prevent management decisions coming into conflict with the interests of shareholders.
IFR: OK. Let’s move now to ECM deal flow in Japan. Looking back at last year and so far this year, the market has been dominated by large bank capital raisings: indeed there is one in the market at the moment which some of you around the table are involved in, for Mizuho. The big bank deals seem to have gone pretty well but have they squeezed out other issuers from tapping the market?
Yoshifumi Otsuka (YO): Of course, we have seen a lot of huge offerings from the financial sector because the issuers needed to meet capital requirements. But we have seen some corporate offerings, too. Some of them had suffered from deterioration in their balance sheets because of the changing economic environment. The Japanese market absorbed most of these offerings successfully, so I don’t think the financial offerings squeezed corporate offerings out of fundraising opportunities.
IFR: Shinohara, in terms of deal flow so far, would you concur with that? Have you been disappointed by the deal flow in ECM looking back on the last year? Is there pent-up demand for more going forward?
MS: I would agree that the large financial institution capital increases did not really push away corporate opportunities. There was quite a lot of demand for the deals, and there was a special reason for the huge financial sector deal flow. I think the corporate side is very much focusing on which areas, strategically, they want to focus on and how to justify the funding, so what’s the specific focus for the business and how to support it from the finance area. And that equity story is going to be the key for the corporate side.In Japan there is some argument about limited growth, but internationally is quite an area for growth and there are, even in Japan, areas for growth in the business. So I think the focus of the equity story is going to the key for the corporate side. And once they do have that, they will approach with equity or equity linked products. But without that there will be a fear of dilution of shareholders rights, so I think it will depend on equity story.
IFR: Doug, so when you go round talking to customers about capital raising, what kind of response are you getting? Are people out there looking for funding in equities?
DH: Yes. The evolution over the last three years has been primarily around financial institutions, mostly at banks and obviously we all saw the Dai-Ichi Life IPO. And that easily represented 50% plus in the last three years of equity financings. There’s clearly been a bit of a migration across to corporate equity now, partly because the financial deals are largely finishing. But from my perspective, I also think that Japanese companies are in a unique position, and possibly facing the last opportunity in the current generation. Western companies in many cases are on their knees at the moment. Currencies are weak; the yen is strong; and Japanese balance sheets are pretty good.Japan lives and dies by its export market and its overseas presence. Now it seems to me the perfect opportunity to aggressively seek acquisitions overseas. And so probably from all of our perspectives, certainly from my perspective, I think that one of the things that will lead to equity financing and equity story over the next two to three years will be equity financing supporting M&A – Japanese companies buying overseas, whether it’s in the West or in the emerging markets.And certainly our view would be that investors would welcome that because they always like a very clear use of proceeds rather than the genericraising money for general corporate purposes. So we think the next two to three years could be quite interesting, with very specific financing requirements as opposed to general balance sheet repair.
IFR: In terms of phasing of this, so the balance sheet repair story is going to play itself out this year?
DH: Probably this year although of course there is the caveat depending, as Kusunose-san mentioned, what happens to the global economy. Japan is relatively well positioned, with reasonably strong balance sheets and fairly conservative management. But if things continue to worsen in a major way overseas, and if China is brought into that, of course that could change things and you may be back to some more balance sheets type thing. But for the time being there will be more financing of strategic initiatives.
IFR: Do you buy the M&A story, Kusunose-san? Will that be a big driver of equity issuance?
TK: Well there are lots of reasons to raise equity on the defensive side and on the offensive side. We hope that Japan will come back to the market again, but the reason ‘why Japan?’ is an issue, right? If we compare Japan to China, what happened in the last year in China is ‘why now?’ But the issue in Japan is ‘why?’ There’s a big difference. The focus is on how much value is embedded in Japan.Last year, most deals focused on the value of the company and everybody was highly price sensitive. Rather than going concerns, people were looking at book value, at the terminal value of the company. So my sense is that Japanese corporates are very cheap and most companies are trading on book value. But equity finance is based upon growth, on the story. Therefore investors are willing to put up money for the corporates and banks for growth and get more return on it.So in that regard, even if the Japanese economy is shrinking and demographics are poor, Japan has the money and companies should aggressively seek opportunities outside Japan. This is how Japanese corporates can survive on a global scale. So event-driven type financing is really one of the drivers for equity raising for the future. Not necessarily in the short-term, but certainly medium to long-term.
IFR: Assuming we see more aggressive event-driven financings, how will this play out in pricing terms? Otsuka-san, as an underwriter, what kind of pricing will the market take?
YO: For straight equity offerings, pricing means discounts. Up to early fiscal 2007, we priced big offerings at a 2% discount. Now, we are giving more generous terms to investors. I think many or almost all the offerings are giving a deeper discount to the investor. I think this is effective; it reflects volatility in the market.
IFR: So you think it’s a temporary phenomenon. Once the volatility subsides you’ll see perhaps keener pricing?
YO: Yes of course, volatility is one of the key factors for pricing. So I think at this moment it’s reasonable to accept a deeper discount.
Click here for Part two of the Roundtable.