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As one of the world's biggest savings nations, Japan is still a wealthy country with plenty of buyers looking for the right portfolios. The poor economic conditions and an unprecedented low interest rate environment have left them with heavy liabilities and fewer sources of income. But non-syndicated yen issuance from January 1 to September 1 1999 has reached $62.01 billion. For the same period last year the figure is $40.31 billion. Japanese cash is ripe for the pickings. As a result, changing patterns of demand from Japanese investors in the Euro-MTN market have meant new challenges for issuers. The market's move away from being heavily oriented towards big institutional buyers like life insurance or casualty insurance funds is the most obvious change. Prior to the financial crisis erupting in 1997, these investors drove demand for bullet maturities and reverse dual currencies. But the events of the last two years brought home to all investors the importance of a two-way crisis where credit and structural risk combine. They now prefer the liquidity of big public Eurobonds. Christopher Cox, director, Euro-MTN trading at Nikko Salomon Smith Barney (NSSB), explains how the difficulties faced by big institutional investors have triggered other types of flows. He says: "There's been a decrease in the importance of central institutions. But the importance of regional investors has significantly increased. The smaller institutions have become more reluctant to leave their investments with larger institutions. They want to manage them themselves." Regional financial institutions can't lend as much in the weak economic environment so they are cash-rich and turning to structured paper to earn a spread. And dealers say they consider the whole gamut of products but ticket sizes are small. They may have two or three separate orders per ¥500 million ($4.54 million ) transaction. Terms of one, two, 15 and 20 years are popular but call options are usually built-in. However, regional investors have to be cautious about structured risk. Koji Omachi, deputy manager, syndicate desk at Nomura Securities, says: "Recently many such investors have been told by their internal regulators to be careful about evaluating such highly structured products, especially if there is a variation in the coupon. They're afraid of undervaluing structured products." Moves to increase the sophistication of the Japanese financial system have meant changes to regulations relating to investments both internally by organisation and externally by central authority. Investment and trust managements (ITMs) have been sizeable investors in Euro-MTNs but the pattern of their growth is being restricted by new regulations. Kenji Setogawa, associate at Morgan Stanley Japan, says: "There is more and more concentration on the so-called central investments or ITMs. They are becoming gigantic investors for two reasons. Firstly, they had internal reasons to invest in unlisted bonds. Secondly, their funding is short-term but it is very difficult to get this tenor in the domestic market." While ITMs used to cover a wide spectrum of maturities, they have become restricted in what they can buy. As the one-year and 10- or 20-year sectors see increased demand, notes with mid-length terms have become less popular. Since June this year, yen notes with maturities of more than one year have to be marked-to-market which means investors have to publicly disclose their positions on a regular basis. Lawrence Temlock, vice-president, MTN syndicate at Merrill Lynch Japan, explains: "The biggest problem facing investors at the moment is the rules on disclosure for money managers are becoming stricter. Yen Euro-MTNs with maturities of more than a year have to be marked-to-market. A lot of money managers will buy notes for less than one year rather than go through that painful process." While Setogawa, at Morgan Stanley Japan, sees the growth of ITMs as a significant boost to the market for Euro-MTNs, others see it as business which the market can do without. One dealer says: "I hate to say it but it means yen Euro-MTN plain vanilla trading is almost like a money market now." But ITMs are increasingly hungry for short-term paper and that's a demand that can be met by issuers ready to be flexible. British corporate, MEPC, issued ¥28 billion-worth of fixed rate notes from June to August 1999. They are all non-syndicated yen deals with maturities of one year. They account for seven of the 10 trades the issuer has done since signing its euro1 billion ($1.06 billion) programme in March, this year. This is quite impressive for a real estate corporate rated A- by Standard & Poor's. And Australia and New Zealand Banking Corporation has managed three short-dated yen deals in the same period. Its ¥3.41 billion note was issued in June and pays 1.5%. It matures in September, this year. Cox, at NSSB, says: "Investment trusts have become more important in the last three or four months. But their overall impact on investor flows is limited. Because they can't now buy anything longer than a year without having to mark it to market, they've concentrated on shorter-dated paper and stretched for yield. Some of the Australian banks and UK corporates have benefited." Since investors would rather avoid the mark-to-market process, the attractions of the domestic market are very appealing. This is all the more acute since there is no public service in Japan to make sure the notes are priced accurately for mark-to-market purposes. Domestic bonds and Samurai MTNs do not need to be marked-to-market the same way as Eurobonds and years are given to the process. This may mean the domestic market could swallow much of the excess cash which may have otherwise gone into Eurobonds or Euro-MTNs. Temlock, at Merrill Lynch Japan, says: "The middle of the curve is not that active. Investors interested in the three- to seven-year sector are looking for Samurai bonds or Uridashi MTNs. It points to the resurgence of the Samurai market as competition for the Euromarket." An Uridashi MTN operates as if it is a hybrid Eurobond which is registered in Japan as a public sector offering. This allows paper to be sold like a Euro-MTN which can also be distributed publicly in Japan. But taking the relatively expensive Samurai or Uridashi route means dealing with complicated documentation procedures and satisfying various eligibility criteria from the Ministry of Finance. It may offer wider distribution channels but there's no guarantee on how well any big block issue will sell in Japan. Japanese investors are still very cautious as to the credit quality of issuers. That said, they will buy low-rated domestic names from well-known Japanese corporates which are domestically rated triple-B and above. They continue to focus on top credits from non-Japanese countries. Those with sovereign linkage are preferred but names rated single-A and above do see demand. Most dealers agree that the market would be quite challenging for issuers that can't meet these high standards. Borrowers like KfW International Finance and Svensk Exportkredit (SEK) are popular. SEK issued ¥401.61 billion-worth of paper off 211 issues between January 1 and September 1 this year, according to MTNWare. It is rated Aa2 and double-A+ by Moody's and Standard & Poor's, respectively. One dealer says: "A lot of investors, especially the smaller ones, rely on external ratings and have strict criteria for what they can buy. So no doubt, we will continue to see a higher rating threshold for borrowers, particularly foreign names." For borrowers to tap into the Japanese investor base, they have to look at short maturities, smaller issue sizes and structured products. The preference for chunky plain vanilla paper has been subdued. The Japanese retail investor's growing importance has boosted the demand for smaller ticket sizes and shorter terms. Individuals with fat wallets are turning away from the low interest savings accounts and pension funds and looking at products like Euro-MTNs for better returns. Knock-in dual currency notes, equity- and Nikkei-linked deals and trigger callables are all in demand. Cox, at NSSB, says: "At first glance it looks like there's been a move towards long-dated paper. But that's not true because so much of it is callable. At least 75% of notes 10-years and longer are callable." In a low interest rate environment, embedded options in notes can act as a substitute for a good base rate. Issuing a straight bond may give zero or negative return. Inserting a call or a put into the note can create higher coupons. Setogawa, at Morgan Stanley Japan, sees a wide range of opportunity. He explains: "Investors want to raise their portfolio average yield. The absolute rate in Japan is so low that they are looking at selling options in any form, such as selling a put on a JGB and getting a premium into the coupon. FX- and US Treasury-linked notes are very popular with a wide range of investors." Bar a major credit event or a sudden increase in the Japanese base rate, the market looks set to continue to demand structured products with in-built calls from top-rated issuers. But borrowers will have to be accommodating to investor demands. Omachi, at Nomura Securities, says: "The top 10 issuers that we've arranged are basically flexible in terms of structure and size or reasonable in terms of cost. The preferable structure is a one-year non-call that's callable six months thereafter. The average MTN issue size is ¥500 million to ¥1 billion."

Big Bang in Japan and the subsequent creation of a low interest rate environment, has encouraged cash-rich investors to consider all kinds of alternative products in their search for yield. Since traditional sources like bank deposits can't offer a good return, retail investors are looking elsewhere. Their niche in the Euro-MTN market has already begun to develop, with a focus on structured notes. The Japanese household sector has an estimated ¥1.2 trillion ($10.83 billion) in financial assets. Optimistic MTN dealers like to think that an increasing proportion of this wealth will find its way into Euro-MTNs. But it is debatable just how much of this will materialize. MTNWare shows that total yen issuance of Euro-MTNs in 1998 was ¥9.04 trillion ($69.28 billion). The market will rise by almost 20% of it sees an extra 1% if the household assets, as some dealers suggest. An increase is generally anticipated, but given the amount of alternative investment instruments opening up to individuals, it is ambitious to think that Euro-MTNs would increase to this extent in the coming year. The buying power of rich, Japanese individuals, the so-called mom and pop investors, is attracting attention from more than just local Japanese brokerages. Reiko Hayashi, Euro-MTN desk at Paribas in Tokyo, says: "People outside the market aren't aware of just how rich Japanese retail investors are. It's a suffering economy but some people still have a huge amount to invest." And these investors are becoming more valuable buyers of Euro-MTNs as the profile of the Japanese investor base changes. The spotlight has turned on them and on regional investors as additional sources of cash, since the market is no longer dominated by institutional buyers. David Bourne, associate director of Euro-MTNs at Deutsche Bank in Tokyo, says: "Big institutional buyers are less active in MTNs than they have been for a long time. It's tough to generalize but they are still a bit shell-shocked from the Asian crisis. They're looking for liquidity so they're more active in bond markets." However, it is difficult to pinpoint exactly what trades are being sold to retail, especially since all dealers are fiercely protective of their distribution channels and sales leads in Japan. What is clear is that the issue size is always small and term lengths are always short, usually between six months and three years. The trades aren't publicly announced and coupons of about 4% are common. Although retail investors in Japan got their fingers burned with structures about eighteen months ago, they are once again focusing on structured products. Issuers wanting to tap into this cash pool will need to consider products more risky than plain vanilla. Equity-, FX- and index-linked products are in demand and call options are also popular. Bourne, at Deutsche Bank, explains why a growing feature of the market since March this year is demand for equity- and Nikkei-linked notes. He says: "There's a lot of retail participation in this as those investors will pay an above market coupon. The retail sector needs to get some kind of pick-up on savings since bank deposits earn little or nothing. Such investors tend to stick with what they know, so equity- and foreign exchange-linked products are popular." However, Kirsty Traill, director at Daiwa Europe, points to the fact that the Nikkei has been increasing over the last six months and that this automatically leads to more demand for equity-linked products. Demand seems to seesaw between equity- and FX-linked notes. She says: "The retail niche has always been there. I would say it's the sector that's changed the least. Because the Nikkei was volatile or dropping, FX-linked trades into retail Japan were popular for the last three years. It generally comes and goes with FX volatilities." As with other retail investors, equity linkage is appealing to Japanese buyers because it is relatively familiar to them. They can benefit from the flexibility of Euro-MTNs by receiving tailor-made notes. Dealers can create a made-to-measure product with ticket sizes, term dates, and linkage to specific stocks. Hayashi, at Paribas, says: "Equity-linked notes are easy for them to understand and give quite high yield. It's usually too expensive for retail investors to buy stocks in for example Sony, but this type of bond allows them access to equity in small tickets which they can afford." Retail investors are willing to pay up to get the structure they want since the alternative returns available to all of them are so low, leading to excess liquidity in the sector. This is good news for borrowers ready to issue the right paper. Borrowers like Orix and Taisei Corp have been able to mop up some of this excess liquidity and raise funds at extremely tight spreads. In January this year, Orix's four-year retail-targeted paper traded at 75 basis points over JPY Libor. By July the spread had come in by 50 basis points. Accessing the Japanese retail investor base requires strong distribution capabilities developed from solid relationships with individual buyers. Japanese dealers like Nomura Securities and the newly-merged Daiwa and Sumitomo Bank have their own retail outlets. This gives them greater control over where paper can be distributed and the ability to cope with large volumes. However, with the collapse of so many of Japan's own banks over the last two years, the opportunity has arisen for foreign dealers to step in. Mergers such as Merrill Lynch's with Yamaichi Securities and Nikko Securities' with Salomon Smith Barney, have enabled international houses to gain local distribution. Morgan Stanley Dean Witter (MSDW) and Sanwa Bank (Sanwa) are the latest banks to collaborate on development and distribution strategy of investment trust products. They signed an agreement to cooperate in providing retail asset management services through Sanwa's distribution channels in August, this year. And Deutsche Bank has formed a joint venture with Kokusai Securities in asset management. They have cooperated on certain retail targeted equity-linked bonds. Non-Japanese houses, without domestic alliances, have to sell to local brokers first, which in turn sell to the retail buyers. They may not get the lion's share of the business but they can devote attention to individual needs. Bourne, at Deutsche Bank, explains: "We don't have our own distribution network in Japan. Therefore we have developed relationships with small retail brokerages. We can source the bonds internationally and they can place them locally." Hayashi, at Paribas, believes the reputations of the brokers Paribas uses are crucial to its success at selling indirectly into retail Japan. She says: "You need good name recognition and stable growth to sell into retail Japan. Image is very important. You also need a good underwriter with good Japanese contacts." But selling into retail Japan is not a cut-and-dried process for issuers. Firstly, prospective issuers must be approved by the Ministry of Finance and comply with strict criteria. The ministry is a safeguard for retail investors. It decides on the creditworthiness of borrowers. The lengthy and expensive legal process makes marketing difficult for dealers. Traill, at Daiwa Europe, says: "Issuers selling to retail Japan are having a great time. It's definitely a niche. But it takes a lot of time, effort and expense to organise. So some people think it's not worth it. There's a lot of documentation issues to resolve but we've seen a steady stream of issuers look into it." The restrictions on issuing into retail Japan mean that the same borrowers appear in the market again and again. For example, Eksportfinans, Svensk Exportkredit, Venantius and the World Bank. But others are also seeing demand. Statens Bostadsfinansierings (Sbab), the Swedish public corporate which finances government housing loans, is rated A2 by Moody's and A+ by Standard & Poor's. Sbab's two yen deals done between January 1 and September 1 this year, both had currency-linked redemptions, according to MTNWare. The ¥3 billion deals had four and five month terms. The growth of the retail sector looks set to take-off over the next year, as terms on other investments fall due. For example, the yucho or postal savings redemptions are approaching. A large proportion of these funds will be invested elsewhere, including, either directly or indirectly, in Euro-MTNs. Unless there is a significant glich in the market, Euro-MTNs should fare well in competition with other financial instruments for retail investor attention. Their inherent flexibility to accommodate size, structure and term compares favourably to alternatives such as Samurai. Traill, at Daiwa Europe, says: "Investors will have more choice as to what to do with their investments as they come up for renewal. But we're not at that stage yet. MTNs will play a key part in that because they can be tailor-made to individual buyers' needs. Securities houses can give retail investors the exact size and structure they want without having to do a block Eurobond or Samurai." On average, a sixty year-old Japanese person has savings of about $150,000 (¥16.5 million). This cash should be readily available for buying small-sized tickets of Euro-MTNs. The right market just needs to be nurtured.

John Deere, the world's largest agricultural equipment manufacturer, is set to sign a $1 billion Euro-MTN facility. It will be the third US corporate of the year to join the market following Textron and Combined Global Funding. Deutsche Bank has scooped the arrangership, its eighteenth this year. It is the leading arranger in 2000 so far. John Deere is a veteran of the debt capital markets. In its funding collection are two Euro-CP programmes, signed in 1989 and 1999, two domestic MTN programmes and two US CP shelves. It also issued a $150 million Eurobond in May 1998. Deutsche Bank was the bookrunner off the deal. The issuer, headquartered in Moline, Illinois, markets its products and equipment in 150 countries, and is probably best known for its tractors. The dealer group off the programme comprises the arranger, ABN Amro, BNP Paribas, Bank of America, Credit Agricole Indosuez, Credit Suisse First Boston, Deutsche Bank, JP Morgan, Merrill Lynch, Salomon Smith Barney and SG.

Brazil HypoVereinsbank (New York) has completed a $300m two year L/C facility for Banco Itau SA. Proceeds are to support a CP programme.

Ever the flash city trader, Gavin Eddy of Warburgs now has a new claim to fame. His swanky Shoreditch flat is to be the setting for the latest advert for the 4-wheel drive offroader - the Toyota Rav 4. But it seems that though the advertising agency was very taken with Gavin's pad, it decided it didn't really need his acting services. They're using a more muscular male model to drape over the bonnet. Better luck next time eh Gav? And the usual crowd turned up to Rupert Lewis' birthday bash in Fulham last weekend, including Gayle Turner, Conor Gallagher and Rob Stoole, also from JP Morgan, (all they need is Timmy the dog and they'd be the Famous Five). CCS' Sean Murphy also joined the party, as did Johnny Fine, the swaps trader from JP Morgan, now a regular in the Leak Table. It may even be worthwhile him setting his sights on Rupert's crown to be star of Leak 2000. With Diageo's Andrew Moorfield and Greenwich's Matt Pass now out of the glitzy world of MTNs, there's all to play for...

We all know that the MTN market attracts some pretty unsavoury types (and we're not just talking about the Diageo treasury team) but it would seem that a spiv of the first order has penetrated the sacred world of power reverse duals. Private Eye, the London-based magazine that roots out scandal and corruption in high places, has unearthed a scam artist with a predilection for young boys, sadomasochism and . . . medium term notes. If we are to believe the latest edition of the rag, this gentleman with a particularly sordid past has been trying to sell MTNs to poor unsuspecting grannies and pocketing the cash. Unfortunately the article also questions the MTN market's reputation as a place of high finance and high morals. It calls an MTN a "fictitious financing mechanism", a "scam" and describes the market as "secret" and even "non-existent". Dealers are outraged by the suggestion that they earn huge amounts of money for doing very little. But perhaps Deutsche's Tiina Lee can smooth their ruffled feathers. She's been appointed chair of IPMA's MTN subcommittee. An honour indeed. She follows such luminaries in the post as DLJ's Matt Carter and ex-Daiwa MTNer Tony Wilson, who is now at the treasury of Arab Bank.

Chase has finally appointed a head of MTNs after a year of head-hunting every dealer in the market. At last Hugo Varney never need look at an MTN ever again. But, alas, our lives are not to be enlivened by Bruce Cairnduff. Chase has decided that they should go for the best money can buy and that man is . . . Garrath Fulford. Yes, the star of the MTN conference circuit, whose speeches are always the highlight of the show, has managed to escape from UBS in Tokyo. He moved there when Gavin Eddy started at the bank in London a year ago. This is Garrath's first move, after spending eight years at Warburg, six of those in MTNs. Joining him on the desk will be Rob Nankivell, an internal transfer from the Sydney branch. Back at Warburg, Stuart Goodwin is being sent off to Tokyo to replace Garrath. But poor Stu is so attached to his new baby - a Jaguar - that he's having it shipped all the way over. Maybe someone should tell him that they do have cars in Tokyo? A new MTNer will be joining Gavin in London soon, someone new to the market. Lets hope he speaks better English than the new Barclays head . . .

The debut note off PSA Corporation's (PSA) $2 billion debt issuance facility has been launched. The five-year $500 million deal pays 7.125nd was lead-managed by Morgan Stanley Dean Witter and JP Morgan, co-arrangers off the shelf. It was signed on July 12. PSA is the second Singaporean borrower to join the market this year. Peter So, associate, capital markets at JP Morgan, believes issuance is tough for the sector. He says: "These issuers would like to place all their notes and have the price they want, but there must be a trade-off between the two." PSA is one of the world's biggest container terminal operators. Its dealers are Credit Suisse First Boston, Deutsche Bank, Development Bank of Singapore, Merrill Lynch, JP Morgan, Morgan Stanley Dean Witter, Salomon Smith Barney and UBS Warburg.

Rabo Australia has raised the ceiling off its Euro-CP programme from A$2 billion ($1.18 billion) to A$3 billion. Citibank and National Australia Bank have been added to the dealer panel. Captiva III Finance has been dropped from the group.

Region of Umbria (Umbria) paved the way for more local authorities in Italy to join the market when it signed the first wholly-underwritten Euro-MTN programme on December 16, last year. This is a step forward for the Italian regions which are bound by strict government regulations regarding international borrowing, since the programme can show all-in funding costs from the outset. Another route into capital markets has been forged for state issuers in Italy and beyond. Umbria's euro2.5 billion ($2.58 billion) facility is arranged and underwritten by Chase Manhattan (Chase), DePfa Bank Europe (DePfa), and Dexia Capital Markets-Crediop (Crediop). Claudio Zecchi, head of financial markets at Crediop, believes that special facilities such as Umbria's could open up the capital markets to more issuers of this type. He says: "It is the first programme of its kind. It is a breakthrough and it will have very interesting implications for other local authorities." Banks involved with Umbria's programme hope it will inspire other government issuers, particularly small regions which otherwise might not have considered the market, to set up Euro-MTN facilities. Chase in Rome devised the structure of Umbria's programme. A spokesman at Chase believes the idea could work in other cases. He says: "This structure was tailored to the needs of the region. And we believe others may have similar needs. We could replicate this structure for them." Italian regions were only permitted by law to issue Eurobonds in 1996. Since then, seven Italian government borrowers have signed Euro-MTN programmes including Region of Lazio, City of Rome and the Republic itself. Deirdre Farrell, manager of business development at DePfa, says: "Increasingly the Italian regions are targeting the capital markets for funding as opposed to the traditional domestic loan market. While only five of the 20 regions have tapped the bond market to date it is expected that there will be increasing activity in the capital markets given the number of regions which are pursuing credit ratings." And Zecchi, at Crediop, is optimistic of growth. He says: "When the market develops and benchmarks are set, it will be easier for these issuers to have a standard Euro-MTN facility. For now it is difficult to know how much it will cost to use this type of security." Umbria's programme permits four issues and these must be before 2001. Each note will be fully underwritten by some or all of the five banks in the dealer group, which comprises the arrangers plus Banca dell'Umbria and Banca Monte dei Paschi di Siena. This makes the platform similar to a loan facility so the full cost of funding can be calculated. Zecchi, at Crediop, says: "Umbria was seeking a sure definition of costs and they wanted a commitment of funds. This put the issuer outside the normal Euro-MTN spectrum." Zecchi, at Crediop, explains the benefits of Umbria's facility. He continues: "In Italy the government requires that authorities make a budget forecast taking into account various costs. If an authority wants to issue debt, costs have to be indicated. But the market is changing and it is difficult to fathom what will happen in the future. With this type of instrument specific costs can be clearly shown." Umbria's need is specific. It must refinance the reconstruction work necessary after an earthquake in 1997. This is a huge project and Umbria's debt facility is large for the size of the region. As a result it requires certain funding safeguards and government backing. Farrell, at DePfa, is hesitant whether other issuers could use this type of facility. She says: "The programme was structured to meet Umbria's funding needs. There could potentially be other regions in Italy which could utilise a similar debt programme in the future but it is unlikely that it would be identical to Umbria's transaction." For now the borrower is only permitted to issue floating or fixed rate notes. But dealers say that once Umbria is established in the market, its programme could be adapted to allow more flexible issuance in private markets. A dealer from Chase says: "The programme at the moment doesn't foresee other usage beyond these four issues, but having said this, for lawyers to make amendments to allow for other types of issuance would be easy." Umbria's first issue was launched on December 20. The euro602 million 19-year note pays floating rate interest, but the issuer can choose to swap into fixed rate any time before 2001 when the note automatically swaps to fixed rate. Umbria will repay note holders using state funds it receives as part of its restructuring programme. The other three trades will be of a similar size, maturity and structure. The second issue is expected within six-months. Growth in the sector will bring steep competition. Umbria expects to receive an Aa3 rating from Moody's, but with three other Italian government issuers rated the same, marketing is crucial. That said, investors snapped up notes from Region of Marche's inaugural euro100 million trade in November, last year. And dealers report there are plenty of buyers eager for exposure to this sector. Farrell, at DePfa, says: "There is a high level of demand in the market for Italian regional issues as evidenced by the level of over-subscription for Region of Marche's issue. Demand for Umbria's paper is also expected to be strong, in particular given the attractiveness of the transaction structure."

JOINT ARRANGERS Chase Manhattan, Deutsche Bank (bookrunner) and DLJ have extended the deadline for sub-underwriters to join the jumbo £588m debt facility backing the leveraged buy-out of United Biscuits (UB). The facility is being syndicated under the name of the new company, Regentrealm. The sub-underwriting phase was due to close today (Friday) but the three leads have given banks another week to push the deal through credit.