Tepco switches on with euro investors
Tokyo Electric Power Company (Tepco) became the first Japanese corporate issuer to tap the single European currency market when it raised Eu750m in early March with a five year fixed rate offering lead managed by IBJ, Paribas and WestLB (which led the company's first Deutschmark issue in 1969).
The electric utility giant prepared the market well with extensive roadshow presentations in Frankfurt, Zurich, Paris and London and the deal was launched to a highly receptive investor base, achieving broad distribution throughout euroland.
The issue demonstrated many of Tepco's traditional virtues - sensitivity to investor demand and a major effort to be transparent and to communicate the company's strong profitability and cashflow strengths.
Flushed with the success of the first issue, the electric utility giant returned to the euromarket to raise a further Eu1bn through the same triumvirate of lead managers, but this time the issue came with a 10 year maturity.
Although this came on the heels of a downgrade of Tepco by Moody's (the company is now rated Aa2/AA), this news had already been discounted. Pricing was 59bp over the January 2009 Bund, equivalent to around 20bp over Euribor, around 10bp over the level where government guaranteed issues were trading in the secondary market.
The five year issue had by that time tightened from 56bp at re-offer to 44bp/43bp. Lead manager Paribas said at the time that only some 10% of the second issue went to the investors in the first transaction, thereby achieving not only a second benchmark in the euro but also accessing another investor base entirely.
Tepco is the world's largest private electric utility with total sales as large as the whole of the UK's electric industry.
Euroweek spoke to Hidehiko Haru about the transaction and the company's view of the markets as the impetus of financial and corporate recovery builds in Japan.
Q: Can you explain your choice of lead managers, especially the choice of IBJ as joint bookrunner for the euro issues?
These issues were our first entry into the new single currency bond market, a move we had been planning since last year when we last met Euroweek.
We selected the three joint lead managers on the grounds that they had considerable experience of leading past issues for Tepco and they were excellent in marketing and distributing in the euro bond market.
In case of IBJ, we chose the firm as joint bookrunner because we appreciated that the firm would be excellent at communicating a Japanese issuer's message to investors and would be a strong co-ordinator among the managers.
Q: At 56bp over the 5.5% April 2004 OAT, some intermediaries and investors considered the first Eu750m deal quite generous and it found strong bids from investors, tightening quickly in the aftermarket to the high 40s. Did the deal represent good value for Tepco?
Japanese companies were almost shut out of the Euromarket for about one year because of the dual influence of anxiety over the Japanese financial system and the downgrade of Japan's country ceiling by Moody's. In order to make our euro issue successful - as the first Japanese privately owned company in the single currency sector following the integration of the euro-11 currencies - we believe the issue spread of 56bp over the 5.5% April 2004 OAT was a fair and proper level.
We think that the tightening in the secondary market resulted in large part from the fact that through the hard work that the lead managers and Tepco put into the investor relations presentations before the issue, we successfully deepened investor understanding of our credit story.
Q: What do you see as the causes for the tightening spreads for leading Japanese issuers in the offshore markets? What do you predict will happen in the months ahead?
Japanese issuers' spreads in the international markets rose drastically at the end of the last year as a result of the nervousness about Japan's financial system and the downgrade of our sovereign ceiling by Moody's.
But, it has gradually diminished more and more, especially since spring this year when Japanese banks were recapitalised by the government.
And now the spread seems stable, with additional support from other government initiatives for the economy to boost domestic demand. We therefore expect the spread to remain stable with some potential for improvement.
Q: Last year, when Euroweek interviewed you (before Japan's downgrade by Moody's), you indicated that the key was to communicate Tepco's profitability and cashflows. Given the downgrade by Moody's in April, did you succeed in this objective when you talked to investors in your roadshow presentations?
We have tried to improve investor understanding of our strong profit generation and strong cashflows, by emphasising several key aspects of our company. Our service area is in the national capital region, with Tokyo as its core, the economic geo-centre of Japan.
In keeping with the medium term growth of this regional economy, our revenue in the region will increase at a steady pace. In the liberalised marketplace for our services, the selling price for our electricity is now at a level that makes us able to beat competition from newcomers.
We have made great efforts at cost reduction over the past several years in anticipation of liberalisation. We can now use our management efficiency improvements not only for lowering electricity rates but also for improving our financial structure, thereby increasing our net worth. We are determined to accelerate our efforts toward increased efficiency. In our management plan we cover all of our investment plans form our internally generated funds.
Q: This year, you have set two benchmarks in the euro sector. What are your offshore issuance plans for the rest of the financial year and why?
We will look at foreign issues when the all-in cost of issuance is the same or lower than the domestic bond market, in which we are one of the most frequent and respected issuers and which has been highly price competitive this year.
Q: Tepco has a major presence in the domestic bond market. How do you view the development of investor demand and pricing in the local corporate bond market. What have you issued this financial year and why?
There is steady demand for domestic corporate bonds from some investors, such as banks, which have realised the disposal of bad loans. Last year, given the concerns over the financial system, many bond investors were so sensitive to creditworthiness that they did not invest lower down the yield curve.
Now that the anxiety is dispelled, lower rated issuers are also properly priced. For Tepco and the other leading issuers, the demand has been strong and the supply of corporate issues has fallen due to improvements in the banking sector. Prices have therefore tightened across the credit spectrum.
We have raised ¥370bn in the domestic market this financial year through six issues.