It was back in March that Dai-ichi Mutual Life was deluged with almost $10bn of orders for its $500m debut in the offshore public bond markets, as investors scrambled for the opportunity to buy into the first Japanese life insurance global bond.
The success of the issue has paved the way for what bankers expect will be more issuance from Japanese life companies, as they explore further funding options overseas. EuroWeek spoke to Koichiro Watanabe, managing executive officer, at the company's headquarters in Tokyo.
Why did you sell the $500m subordinated issue and why at that time?
Watanabe: The biggest reason was to diversify our capital portfolio. Subordinated debt comprises a very small part of our capital even after the transaction.
In terms of timing, with the recovery in the credit fundamentals of Japanese banks, we saw it was a good time for Japanese financial institutions to issue subordinated debt. In addition, US dollar interest rates were then at their lowest this year, which enabled us to achieve the cheapest cost of funding among recent issues by Japanese financial institutions.
Were you surprised by the pricing of the issue?
Watanabe: The price was in line with our expectations. It is a fact that we are rated the same as the large Japanese banks. However, we understand the difficulty for investors to analyse a new industry, such as insurance. We also appreciate that it is difficult to forecast how realistic the ?too big to fail' story is for the insurance industry. Consequently, in absolute terms, our subordinated debt was priced at the lowest spread level among recent Japanese financial institutions. We are satisfied with the result.
What impact on the Dai-ichi balance sheet does this issue have and how do the regulators and the rating agencies treat the issue of 10 year subordinated debt by a life insurer?
Watanabe: Our adjusted net assets reached ¥3tr at the end of last fiscal year, and the subordinated debt issue contributes only several percent to that. In that sense, the financial impact of the issue is limited. However, it is pleasing for us to have such a warm reception by non-Japanese investors.
The Japanese regulator accepts subordinated bonds as regulatory capital. Rating agencies also welcomed the issue because the issue has demonstrated the ability for Japanese mutual life insurers to raise funds.
The action is positive in enhancing our open-minded attitude towards the capital market.
What funding options did you have at that time in the domestic market for a subordinated issue and what would the pricing and size then have been?
Watanabe: The credit spread might have been lower in Japan at that time, but the size of the issue was greater by issuing outside Japan.
What other funding options are there in the global markets for subordinated debt? For example, would you consider a euro issue, or is that market not sufficiently deep and liquid?
Watanabe: I believe the euro bond option is feasible. Some Japanese banks have already issued in euros, and they are well received. Generally, it seems that euro investors are more familiar to invest in an insurer's deeper subordinated capital, such as perpetual non-call 10.
Having set this benchmark in the dollar market, would you like to return in dollars for longer dated issues?
Watanabe: This is also an option for us. However, there is no immediate plan to issue any subordinated bonds in any market. Actually, we have recently launched our foundation fund securities in the Japanese domestic market in August.
In brief, can you characterise the current credit-worthiness of the life insurance market in Japan, from your company's perspective?
Watanabe: It is recovering. Since 1997, seven life companies have failed, and credit for the life industry was more difficult to obtain. However, the worst period is over and for example the ratings of some lower rated insurers are improving.
Do you expect other life insurers to follow your lead?
Watanabe: Yes, we do. Although we cannot talk about the strategy of other life companies, it is clear that our issue has helped decrease uncertainties for overseas issuance for Japanese life insurers and we hope the market is now more liquid.