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Wednesday, 22 November 2017

Yen Bond House

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Anticipating change: The dynamics of Japanese markets have shifted quickly and significantly over the past 12–18 months. For staying ahead of the curve, helping a variety of issuers access the yen market, for opening new horizons for Japanese investors and for its unmatched distribution capability, Mizuho is IFR’s Yen Bond House of the Year.

To see the full digital edition of the IFR Review of the Year, please click here.

Japan has started to open up to foreign issuers again. Besides Tokyo hosting the annual IMF meeting for the first time in almost 40 years, several landmark transactions got executed in yen in 2012. The first transaction from a Middle Eastern credit and the first Euroyen deal from a Latin American financial institution are just a couple of key Mizuho deals which made headlines in Japan this year.

As Japanese investors moved into uncharted territory, Mizuho was one of their foremost guides. In 2012, the bank not only leveraged the prestige that goes with being a primary dealer in Japanese government bonds, but also showed that it could execute unusual and difficult trades. A good part of that ability comes from the bank’s strong research team and its leading position as a trader in the credit markets.

That finger on the pulse helped Mizuho identify some of the unfolding trends before they had fully materialised. For instance, early in the year, Mizuho realised that the Japanese market was ready for Middle Eastern credits after the Republic of Turkey generated strong demand for its ¥90bn 10-year deal, which the Japan Bank for International Cooperation guaranteed.

Even though Mizuho was not involved in the Turkish transaction, it jumped on the opportunity and worked with Qatar Petroleum (Aa2/AA) to bring the first Middle Eastern credit to fund in yen. To ensure that conservative regional accounts would participate, the company chose to add a JBIC guarantee, even though it is rated above the policy lender, which has Aa3/AA– ratings.

JBIC’s guarantee of around 95% meant that the deal was far from a pure Middle Eastern credit, but it provided a shortcut through all the formalities of a yen deal. The wrap was the key component in getting major Japanese investors to accept a debut deal from a relatively unfamiliar issuer.

Mizuho was a bookrunner alongside Daiwa, Mitsubishi UFJ Morgan Stanley, Nomura and SMBC Nikko.*

Trying circumstances

Earlier in the year, Mizuho had already demonstrated its distribution expertise in the most trying of circumstances. Its work on Nordea’s ¥120bn multi-tranche bond was both savvy and sensible. The transaction came at a challenging time, shortly after Eksportfinans had been downgraded, which tarnished the image of Nordic banks among Japanese investors. However, with careful timing, investor education and by leveraging its regional distribution capability, Mizuho pulled it off along with Bank of America Merrill Lynch and Nomura.

Far from being only a Samurai house, Mizuho played key roles on some of the year’s most important Euroyen transactions as well. When Brazil’s Banco do Brasil (Baa2/BBB/BBB) returned to the yen market after a 17-year absence, Mizuho joint led the ¥24.7bn three-year Euroyen trade, along with Bank of America Merrill Lynch, BB Securities, JP Morgan and SMBC Nikko.

While strictly anything other than a local law-based Samurai transaction is a private placement in Japan, the deal was as close as it gets to a widely marketed offering. In fact, the only Samurais to come out of Brazil are the government and the quasi-sovereign BNDES. There has been not a single Samurai from a Latin American commercial bank.

“The importance of this deal is that it has the potential to change the trend in the yen market, in the same way the US FIG issuers in the old days brought the European and the Australian banks to the Samurai market. The same analogy can be applied here with BdB attracting more emerging market names in the future,” said Takao Okubo, head of the global capital markets promotion department at Mizuho.

The deal, carrying an attractive 1.8% coupon, was also priced using the Samurai convention of offer-side swaps, coming 146bp over. Besides the regional importance, being a Latin American bank, this was also the first Triple B rated financial institution to tap the Japanese market since the Lehman bankruptcy in 2008.

Mizuho also won a lead manager role, together with Mitsubishi UFJ Morgan Stanley and Nomura, when Westpac did its dual tranche ¥114bn issue, the largest Australian yen offering since February 2009, when ANZ raised ¥150bn via a government-guaranteed deal.

The deal, which was increased from ¥100bn, attracted participation from a variety of accounts, ranging from large investors to smaller regional banks. The highlight, however, was increased participation from pension funds and asset managers, especially in comparison with Westpac’s previous ¥100bn foray in August when the overall regional demand was around 60%.

Full service on offer

International investors have also come to appreciate the service that Mizuho offers. The shop has made it standard procedure to follow the introduction of a new credit into the Japanese market with research and a trading capacity. “We know that we have full service from Mizuho,” said a Tokyo-based portfolio manager for a US asset manager.

But a good bond house is not made only of research and a large Rolodex. Execution and advisory are key factors and Mizuho proved has itself on both counts. Key issuers in the Japanese market prize the guidance that Mizuho offers. “They are always offering me ideas and monitoring the market,” said the head of funding at a European financial institution.

Mizuho also has a claim to be the shop of choice for issuers when it comes to custody and documentation. That gives the firm an edge in reading market conditions. Custodial banks are the first ones to know, for example, when there is additional investor demand for a particular sector or geography. And that is one of the advantages Mizuho enjoys when recommending issuance strategies.

New era

The result of all these various factors is that Mizuho has shown itself to be the right bank to lead Japan’s famously conservative investors into a new era of financial globalisation. It is traditional enough to earn the trust of local accounts yet also well tuned into new global trends to bring them to Tokyo.

“Japanese customers always have to be our first priority. We continue to try to anticipate instead of react to new trends,” said Richard Tarn, executive director of DCM, Europe, at the bank.

That approach paid off in 2012 – for issuers and investors alike.

* Correction: this paragraph wrongly attributed the contributions of the banks involved and has been changed.

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