One of the most spectacular bonds of the year by a Japanese issuer was the highly successful July sale of Eu1.25bn of subordinated debt by Japanese banking group Sumitomo Mitsui Banking Corp. EuroWeek asked Takahiro Yazawa, general manager in the investor relations department, about the objectives of the transaction and SMBC's issuance plans.
Why the timing of the July deal and why in euros?
Yazawa: We decided to go to market, seeing that the overall market conditions had been stable and the secondary spread of Japanese bank securities were the tightest at any time in the past several years. We took advantage of this favourable market environment as soon as the audited financial statements for fiscal 2003 became available.
As for the choice of currency, the primary goal of the offering was to access new investors in Europe and diversify our sources of capital. We assumed euro denominated bonds would create the largest demand from high quality European investors and therefore would be the best choice to achieve our goal.
Did the news surrounding UFJ have a negative impact on either demand for the issue or the pricing?
Yazawa: We were not aware of any negative impact of the news surrounding the UFJ integration on our deal. Rather, the news had a positive effect on the deal because it focused investor attention on the Japanese banking sector in general and helped lead to tightening secondary spreads of the outstanding Japanese banks' capital securities.
To what factors do you attribute the achievement of a 75bp spread to Libor swaps at re-offer, the tightest achieved by any Japanese bank in the global capital markets in recent years?
Yazawa: In our view, the tight re-offer spread was achieved due to several factors, such as the timing of the deal, a persuasive credit story, an effective marketing strategy, the successful roadshow and excellent deal management by the joint bookrunners.
How would you characterise the order book of demand?
Yazawa: The order book was to our greatest satisfaction both in terms of investor quality and geographical diversification. The deal attracted more than 200 orders and the majority of them came from long term investors such as fund managers and insurance companies, including the most sophisticated and influential investors in Europe and Asia.
More than 70% of the demand came from Europe and about 20% from non-Japan Asia, which we believe was the best mix of demand in terms of geographical diversification.
As to the high level of demand, the final figure was at the highest end of our expectations, although our three joint bookrunners had been accurate and well informed in predicting demand levels.
Can you explain the rationale for the choice of each of the three bookrunners (Daiwa SMBC, Goldman Sachs, UBS) ?
Yazawa: We appointed the three bookrunners in view of the quality of their proposals, strength of salesforce, ability and experience of deal management.
Has the Japanese bank sector now stabilised and in your view is the SMBC credit an improving story?
Yazawa: The Japanese banking sector has stabilised and has been steadily recovering due to the improvement in the Japanese economy and recent progress in the non-performing loan (NPL) problem. We expect the SMBC credit will further improve in this fiscal year, which we regard as the final year of our intensive restructuring period for NPLs and other financial issues.
By all accounts, the roadshow was a huge success. In your view, why was it so successful?
Yazawa: In our roadshow, we emphasised the steady recovery of the Japanese economy and the banking sector as well as the leading position of SMBC in the industry. We assume such a recovery story was appealing to many investors who had interest but had small or no exposure to Japanese banks.
What does the pricing and success of this issue say about the pricing relativities of Japanese credits to other similarly rated bank credits from the US or Europe?
Yazawa: One of our marketing strategies was to call investors' attention to the relative value of our bonds compared to the bonds of US and European banks. The fact that our bonds were priced at as tight as 75bp over Euribor implies that many investors agreed to our relative value analysis.
We hope that the difference in credit spreads between Japanese banks and similarly rated US and European banks will further compress and disappear in the future, when the Japanese bank credit picture improves further and premiums on Japanese bank paper are no longer required.
What issuance plans do you have for senior debt or capital securities at home and abroad in the year ahead?
Yazawa: SMBC is a regular issuer of senior and subordinated bonds in the domestic market and may tap the market at least once or more in this fiscal year.
As for overseas offerings, we wish to maintain good access to the overseas market and we might seek opportunities for another international offering. At present, however, we do not have any specific plans as we have just finished this very successful deal.