Japanese ECM Roundtable 2010: Part III
IFR: So might it?
DA: Well I think it’s common knowledge that Mizuho would benefit from some additional common equity. The shelf registration did not surprise anyone in the market and I think they welcomed it; the stock price was actually up on the shelf registration filing, which was quite a vote of confidence from investors. And you know, we’ll have to see whether or not they launch and if they launch when they would launch. They said that they now have an option over the next 12 months.
IFR: So were it to launch at some point this year, would the issue find a willing market?
MS: I think Doug’s comment was a very good comment. After the announcement of that possibility, the share price went up and the market is big, with quite a large investment base. I’m not sure what’s going to happen, but always positive I think.
IFR: We’ve talked about IPOs and we’ve talked about some of the provenance capital raisings. I’d like to talk a little bit about convertible bonds now because this is a classic funding tool for Japanese corporates and has been for a long time. I’d like to get some sense of the prospects for CBs, given that the straight bond market has been on fire for 15 to18 months with very good pricing available. Are CBs a a good instrument in this market?
YO: I think from last year we’ve seen several transactions for Japanese corporates and most of them or almost all of them were received well and are performing well. So far investor sentiment has been good, Japanese credit is tight and spreads are tight so I think we will find appetite.
MS: I think this product is a great product. There’s a strong need from the market, the CB funds love it; even retail loves it. And if you look back a few years ago, when you go into the equity or the equity linked market, it was equally divided 25% convertible, 25% IPO, 25% public offering, 25% REIT. Now the market is very much focused on capital increases.
So we would like to see some diversity; The hedge funds and CB funds lost quite a lot of money in 2008, but it came back dramatically in 2009. So it’s the product everyone’s waiting for and there are good conditions to issue. I think last year there was about US$5bn in the Japanese market in Japan and this year hopefully some will come out.
IFR: To your point Doug about international placement, there’s a huge demand internationally for convertible product generally because the market has been starved. Do you see issuance emerging from Japan that you could place?
DH: Well as of right now, I don’t think we see as much issuance as we would like to see. I think we all agree it’s a great product and there’s a huge demand domestically and internationally. There are many big global convertible funds that are absolutely starved of Japanese paper right now. And a convertible fund is quite different from an equity fund. If you’re an equity fund and you want 10% or 20% of your global portfolio in Japan, it’s very easy to just go to TSE, there’s publicly traded stock. The problem is, if you’re a global convertible fund you simply cannot do that. There is such a small amount of supply from Japan that you cannot, even if you want to be weighted Japan, be evenly weighted Japan.
And that means that technically of course, there’s huge latent demand for Japanese convertibles. But I think at the moment it almost feels a little bit like it felt 25 years ago when some of us were first in the market: there were debt deals and there were equity deals. And nothing in between. So there’s massive demand, but at least this year I don’t see a huge amount of convertibles coming out of Japan, regrettably.
IFR: Looking at the kind of market-share breakdown of Japanese ECM, there is one elephant in the room: Nomura, which has a market share of around 40%. I don’t think you get that kind of breakdown elsewhere. What can you do to make the market a bit less one sided?
SK: Right now, 50% of stock offerings are allocated to retail (and we don’t have a retail network). This is a really unique feature of the market in Japan, so I guess we should keep that uniqueness. In Japan, Nomura is dominant and we just respect Nomura’s presence here. But we will continue to fight! We are competing at a different angle to access different investors. If you look at the market, we are probably competing within a 30% market share; domestic firms own between 50% and 70%. So the league table is not necessarily a good metric to define competition, but Nomura is really at the top and unique. I have no comment other than: ‘That’s life!’.
DH: Yes. Japan is somewhat unique in that it has such a strong direct retail presence. The reality is that retail participation for equity in America and Japan is the same. The difference with Japan is it’s direct and in the US it’s indirect. i.e. Mrs Smith in Ohio buys a technology fund from Fidelity and that invests in Hitachi. Whereas in Japan Mrs Watanabe would simply invest directly in Hitachi. So I think it will probably evolve over time.
To me, I think, we were talking IPOs before. I think one of the more exciting growth areas in Japan is going to be the asset management business over the next 10 to 20 years. So we all waiting to try and find a good asset management IPO in the market because I think they will be very successful.
IFR: There is increasing talk about asset management firms taking the place of investment banks as the notion of direct offerings develops, given the restrictions and regulatory constraints imposed on investment banks. From a market structure perspective, do any of you foresee a time when there will be direct issuance of a company going straight to asset managers and negotiating among themselves?
DH: You’re absolutely right. We’ve seen a bit more in the debt markets so far, but overseas there has been a few situations where institutional private equity firms or fund managers have actually got involved directly in underwriting, not an entire deal really, but a portion of the deal. It’s interesting to see how it develops because back to our earlier observation about pricing. if I were an issuer, I would never want to negotiate directly with one asset manager because by definition, it’s got be (a) confidential and therefore (b) you’re not going to get the best price. I think the role that firms such as the four of us here at this table play, is when you’re doing an offering and generating the maximum amount of demand from investors all around the world in Japan and overseas, you then get the best pricing competition and get the best price together with good aftermarket hopefully for the client.
I don’t think issuers ever benefit from any single or small group of banks or investors having dominant control over the distribution and pricing of deals. So the competition clearly remains a good thing.
IFR: Will there be more deals this year from less well known companies rather than major household names. Last year we saw the likes of Hitachi and NEC, companies that are well known to everybody. This week [in late May) we saw DIC, a world leader in chemicals for inks but not well known. Is this a trend we’re going to see where companies that are well less known tap the market?
DH: Well I’ve had some investors tell me that if a Japanese company has not done an equity offering in the last five years, they assume they will do equity in the next five years. It’s as simple as that. The opportunities right now around the world are amazing. You have strong Japanese companies in relatively good shape at a time when many foreign competitors are having problems. And if you want to grow, then by definition equity is going to be an important part of that.
Now I would say for Japan as a country, having Japanese companies do equity is important because I think if you look around the world at companies where there is very little equity flow, one conclusion you draw from that is that that country is simply not growing. The analogy might be: if you’re an old man, you don’t need to eat a lot of food because you don’t do anything. And if you’re a young person, and you’re energetic and you’re trying to grow, you’re trying to expand and you’re trying to do stuff, you have to by definition consume a lot of food, you have a lot of energy, i.e. equity.
So, I think we all around the table hope that there is an active equity calendar in Japan because to the extent there is I think that’s a reflection of confidence in the future of Japanese companies, their ability to expand overseas and it will be good for Japan. To the extent that there is little Japanese equity that will be frankly not a positive sign for the country.
MS: I think that this year a mixture of names will come out but it will be unique names with a story.
YO : I think the capital market is open for companies, as long as they have a good story, I think the market wants growth in the story and you know, a lot of Japanese companies are looking at opportunities in Asia and emerging markets. So I think we can expect some special kind of situations like M&A as opposed to the standard.
TK: As long as corporates generate cash and make good profits, and apply it to retained earnings there’s no equity required. That was the situation in 2004, 2005, 2006. But right now the Japanese market is somewhere in between so companies need opportunities to grow and are focusing hard on where to invest and how much. In that regard, equity is definitely key to the next generation growth strategies.
IFR: Gentlemen: thank you all very much.