Japanese banks wipe smiles

Press, 6 September 1989, Page 42

Japanese banks wipe smiles

Remember the smirks of westerners over shoddy Japanese cars in the early 19705? Detroit is not laughing now. American and European bankers looked as smug as any carmaker when, five years ago, Japanese banks and securities houses pushed into London’s and other European capital markets with cheap, commodity-type financial products that required deep pockets but little nous.

They thought that leading Eurobond issues, bidding for American Treasury bonds, lending to British local authorities and guaranteeing bond issues was the best the Japnese could manage; they would not be able to handle the clever stuff, such as turning a simple bond issue into a four-or five-legged swap. The smiles are now gone from Western bankers’ faces, too.

Far from confining themselves to wholesale markets abroad, the Japanese have started to attack the more lucrative corporate-finance business dominated by American banks.

They are putting to good use lessons learned in the mid-1980s when Western investment banks used them as legmen. The westerners would come up with a nifty financial idea — often involving options — and use the Japanese to find buyers for it in what then became the Eurobond market’s biggest retail outlet, Tokyo. Gradually, the Japanese intermediaries worked out how to do such deals themselves.

Interest-rate and currency swaps, the smartest financial techniques of the mid1980s, are now old hat to Japanese banks. IBJ International, the Londonbased arm of the Industrial Bank of

Japan, says that all of the 50 Eurobond deals it lead-managed in the past year had swaps behind them. Half the swaps it arranged itself. It has moved on to more sophisticated stuff. In mid-June, it led a SUS2OM (SNS3SM) bond issue that linked repayment to the oil-price. That, however, was still a clone, imitating deals done by Chase Manhattan and Bankers Trust. Japanese banks are also copying ever cleverer deals being done by Westerners such as linking the redemptionof yen bonds for foreign borrowers to the price of Japanese stockmarket indexes.

To make money from such deals a bank has to be able to dismantle the original bond, which it does by organising a series of interest-rate and currency swaps. The swaps mean that the foreign borrower gets the currency it wants and the arranging bank does not have to expose itself either to currency or interest-rate risk.

Since the redemption of the bonds is tied to the level of a stock index, the bank ends up with a long-term option on the stock index which it can either sell in Japan or outside. This catching up by the Japanese is leading Western banks to be more careful about how they deal with Japanese banks and brokers. Most Eurobond houses now reserve their smartest ideas for private placements. In these, they deal directly with both borrower and investor. That makes it harder for others to clone new inventions. At the beginning of July, for example, Bankers Trust rolled out an innovative private deal that lets in-

vestors use interest-rate options to exploit kinks in the dollar yield curve. After moving successfully from their bridgehead in the wholesale markets to trying our (albeit secondhand) complicated financial techniques, the test for the Japanese banks is whether or not they can innovate. As yet they have shown no sign that they can. Financial products do not lend themselves to the sort of increment enhancement that the Japanese have shown themselves to be good at in the field of mass manufacturing.

Japanese banks can afford to buy in the brains they need. But harder to secure, though just as important as a stimulus for innovation, is the breadth of clients that Western banks have. Not only does that put Western banks nearer the market (something Japanese manufacturers have always known the value of) so that problems come to them in seach of imaginative solutions. But also, as deals become more fiddly, it is more important for a bank to have clients with different needs and views who can take-different ends of the deal. Take Eurobonds, for example. The four big Japanese securities houses dominate the rankings of Eurobond lead managers because of the boom in issues of bonds with Japanese equity warrants. So far this year, almost SUS4OB (SNZ7IB) of equity-warrant issues have been launched. Most of these deals were for Japanese companies and were organised by Japanese securities houses. Yet strip out equity-linked deals and the Japanese dominance of the league becomes less pronounced. The leaders in the non-equity-linked table, Credit Suisse

First Boston and J. P. Morgan, do business with a much wider range of customers, from American corporations to the government of Australia. Besides this lack of customers, Japanese banks also restrict themselves largely to issuing bonds in two currencies, yen and dollars. These currencies account for over 90 per cent of the Eurobonds organised by Japanese banks and securities companies, though only around , half of all Eurobonds issued. The Japanese are trying to change that. At the end of June, IBJ International launched a sCan 150 M (SNZ22IM) issue for the World Bank. Since the World Bank is such a prestigious borrower, it can pick and choose its lead managers. So expect IBJ to lead more Canadian-doll3r deals — and to be prepared to accept wafer-thin margins to establish its name in the market. Another sign of the Japanese banks’ determination to make the leap to the next phase of corporate finance itf the way they are shying way from linking up with established Western firms as a way of overcoming their inexperience. For various reasons, tie-ups such as Sumitomo Bank’s stake in Goldman Sachs have been a disappointment. Now Japanese firms are investing in newly established firms or in new areas — such as Nikko Securities’ investment in a mergers and acquisition (M and A) boutique, Blackstone, and Nomura’s 20 per cent share in another M and A firm, Wassersterin, Perella. — “The Economist"