Japan Achievement Awards: Why they won, part 1

We explain the rationale for this year's Japan Achievement Awards winners, starting with the winners of our House Awards.

Last month, we named the winners of our annual Japan Achievement Awards. Today, we begin setting out in detail why the winners caught our eye. We start with the House Awards, and will continue to the Deal Awards tomorrow. The awards will be presented at a reception in early July.

Best Bank

Japan’s banks rushed to secure dollars last year as their domestic clients continue to expand overseas in search of higher-growth markets. For The Bank of Tokyo-Mitsubishi UFJ, our Best Bank for the year, the task was made much easier by its long roots in California and the US West Coast through what is today MUFG Union Bank.

The US subsidiary is a growing source of profit as MUFG looks to diversify geographically. For the first six months ending September 2016, its US banking operations accounted for ¥30.9 billion ($283 million at current rates) of the group’s total net income of ¥490.5 billion. The 22% ownership of Morgan Stanley and their joint ventures in Japan chipped in another ¥30.5 billion.

In a March 2017 report, Moody’s said the rapid expansion of MUFG’s overseas business, particularly in the US, was helping diversify the bank’s overall risk.

“MUFG’s overseas revenues, powered by interest and non-interest income, have grown to one-third of its total revenues before eliminations, and represents one of the mitigants to its asset risk,” Moody’s said in the report.

Expansion has also been under way in Asia, chiefly through MUFG’s ownership of Bank of Ayudhya in Thailand, which contributed another ¥24 billion in net income for the six months ending in September 2016.

All of this proved beneficial as MUFG and its major banking rivals were forced to cope with the Bank of Japan’s limited introduction of negative interest rates in January 2016, which roiled markets and hit profits across the board.

In addition, MUFG is looking to take a leading role in the formation of a cross-border payments business backed by blockchain technology, having invested in California-based bitcoin exchange Coinbase. It is also studying the development of its own digital currency, a move that would be a first among Japan’s banks. 

Best Investment Bank

Japan’s biggest brokerage has retaken the crown as the country’s Best Investment Bank of the year. The award reflects the unmatched range of investment banking services Nomura can bring. It also came out tops in terms of core investment banking revenues with an overall market share of 15.9%, edging out Mizuho Securities on 14.9%, according to data compiled by Dealogic.

Equity capital markets, as always, was a standout strength. Nomura was bookrunner for 67 ECM offerings during the review period (financial year ending March 31, 2017), beating second-placed SMBC Nikko on 64, according to Dealogic.  Front and centre was the complex, dual-listed IPO for Line, which involved extensive negotiations with both the Tokyo Stock Exchange and the New York Stock Exchange to meet their differing rules.

Just after the review period, the firm also received the welcome news it will remain in the lead global coordinator role in the next phase of the jumbo-sized privatisation of Japan Post, the timing for which has yet to be announced.

Nomura also caught our eye for an innovative Suzuki Motor convertible bond offer totalling ¥200 billion ($1.8 billion) over two tranches, for which it acted as sole bookrunner and lead manager. Suzuki Motor wanted to avoid dilution as much as possible, resulting in a “dilution cap feature,” that offered two forms of net share settlement: a bondholder option and an issuer option, both subject to a cap.

On the Debt capital markets side, the firm was in on many of the year’s major offerings from such stalwarts as the Development Bank of Japan, Japan Bank for International Development, and Panasonic. It also served as a joint bookrunner on the CITIC ¥100 billion ($958 million) four-tranche samurai bond that was the group’s first samurai in 20 years.

In the M&A arena, Nomura chalked up 103 completed Japan-linked deals for the review period, according to Dealogic, although its lack of blockbuster deals pushed it down the league order in terms of overall deal value, putting it in sixth place with a 16.7% share.

It has also positioned itself to support broader efforts to build a more entrepreneurial Japan, announcing the launch in early April of N-Village, a wholly-owned subsidiary focused on new business development for smaller start-ups, with an initial ¥10 billion ($92 million) investment. Nomura is also looking at its own overseas expansion.

After sharp cutbacks affecting around 900 people over the past year, Nomura said it planned to hire more bankers in the key US market to help capture a greater share of cross-border business.

Best Foreign Investment Bank
Morgan Stanley

With its strong foothold across a range of sectors, not to mention its continued cooperation with stakeholder MUFG, Morgan Stanley is again our pick for Japan’s Best Foreign Investment Bank. Its core investment banking revenues were well ahead of other foreign houses, trailing only domestic duo Nomura and Mizuho to rack up a 14% share, according to Dealogic.

M&A was a major contributor. Key advisory mandates included the sale of 84.3% of Supercell to China’s Tencent for $8.6 billion, Endurance Speciality in its sale to Sompo Holdings for $6.3 billion, and KKR in its $4.3 billion purchase of auto parts group Calsonic Kansei from Nissan Motor. Overall, it was No. 1 in the completed M&A league tables for the review period and was also our pick for the M&A House award.

Morgan Stanley was a major player in many of the biggest equity offerings of the year in what was generally a difficult year for equity fundraising, with many companies looking instead to debt financing. It was a global coordinator and bookrunner for Recruit Holdings’ ¥230 billion follow-on offering and a global coordinator and bookrunner for the complex $1.3 billion IPO by Internet messaging group Line. 

It also played a lead role in getting Kyushu Railway, part of the JR national network, out of the station for the largest IPO of the year in Japan and one of the biggest globally, with a total value of ¥416 billion ($4.0 billion).

In the more upbeat DCM sector, Morgan Stanley’s biggest deal was a not-inconsequential $8.5 billion series of TLAC-eligible notes for MUFG, which it then teamed up to jointly book-run a ¥85 billion sustainability bond by Starbucks. That was the first-ever international bond offering by the ubiquitous coffee brand and their lowest-ever coupon at 0.372%, which presumably perked up the mood at the off ice of Starbucks’ treasurer in Seattle.

Best M&A House
Morgan Stanley

Our pick for M&A House had a busy year, crowding out smaller rivals to take a 36.8% share of the market with 56 completed deals worth a total of $85.0 billion. Representations were also well balanced with a roughly equal mix between buyer and seller and both inbound and outbound M&A deals.

Its biggest mandate involved representing Finland’s Supercell in the sale of 84% of the company to China’s Tencent for $8.6 billion. The deal valued the maker of mobile video game Clash Royale at more than double its level just a year earlier. The purchase covered the entire 72% stake owned by Softbank and one half of the shares owned by former and current employees, helping to spread around the benefit of the sharp markup in value.

The deal was also notable for representing the largest-ever outbound China technology acquisition, extending Morgan Stanley’s strong run in the tech sector. According to the US bank, it has advised on 16 of 26 global technology deals worth more than $1 billion.

Another of its salient deals was the largest-ever acquisition by earthmover Komatsu in its long-running battle with industry leader Caterpillar (a competition that has drawn the attention of US President Donald Trump).  The $3.6 billion combination of Komatsu and Milwaukee-based Joy will put the company close to the US market leader in terms of mining sector revenues, although the sector as a whole has been hit by weaker commodity prices. The deal closed on April 5 (just missing out for individual deal consideration).

Morgan Stanley also acted as sole financial adviser to KKR in its $4.3 billion acquisition of Calsonic Kansei, representing something of a breakthrough for private equity firms in a market reluctant to see drastic restructurings. It came at a price, however, representing a hefty 81% premium to the market before the news emerged. And there is plenty left for the US bank to do. Another KKR acquisition, this time the $1.3 billion purchase of power tool manufacturer Hitachi Koki, Kirin’s exit from Brazil via a trade sale to Heineken, and the Softbank purchase of investment group Fortress, had all yet to close as of press time.

Best ECM House

Despite the allure of bonds as the Bank of Japan dabbled with negative interest rates, there were many firsts in equity offerings this year and it was difficult not to find the name Nomura attached to the biggest and most complex of them. Overall, the firm was bookrunner/lead manager on 67 ECM offerings, the highest among any firm. Those included the lion’s share of the country’s top-10.

Topping the list was the ¥416 billion ($4.0 billion) global IPO by Kyushu Railway, which joined other parts of the former Japan National Railways on the bourse. The offering was the largest in Japan in 2016 and one of the biggest globally. With a strong regional presence in real estate as well as offering new high-speed links, the company, also known as JR Kyushu, was a favourite with domestic investors, pricing at the upper end of its price range and gaining another 15% in value on the first day of trading on October 25.  Its subsequent performance has also been strong.

As of late April, JR Kyushu was up 34% from its IPO price, clocking in way ahead of the Nikkei, which has been up just 9.5% in the same period.  Not quite as large but in many ways much more complex, was the dual TSE/NYSE $1.3 billion listing for Line, the online messaging group.  It was the year’s largest technology IPO in both Asia and the US and involved in-depth negotiations with both exchanges to try to meet disparate listing rules (see the Best IPO award).

Nomura also acted as sole bookrunner and lead manager in the flotation of ¥200 billion in convertible bonds by Suzuki Motors. The company wanted to expand its market lead in the fast-growing Indian auto market but needed to limit any shareholder dilution as it dealt with activist shareholder Daniel Loeb of Third Point. The result was a unique “dilution-minimising” bond. 

Rounding out the offerings was a secondary listing by Recruit Holdings totalling ¥230 billion, for which Nomura was a global coordinator, bookrunner, and lead manager, as well as in the March relisting of Sushiro, a leader in the uniquely Japanese institution of conveyer belt sushi restaurants.

Best DCM House
Bank of America Merrill Lynch

With the US economy expanding healthily and swap rates at favourable levels, dollar funding was the new black for Japanese companies this past year, and that played right into the strengths of our DCM House for the year, Bank of America Merrill Lynch.

For Japan Tobacco, BAML put together a dual tranche $1.25 billion Reg-S bond offering that drew total demand of $9.6 billion. With tobacco companies facing image issues and Japan Tobacco an absentee from the dollar market since 2013, BAML fanned out in roadshows in Hong Kong, Singapore, London, and Geneva, as well as in Tokyo.

BAML also demonstrated its domestic muscle, joint bookrunning a Panasonic three-tranche ¥400 billion deal with 37 one-to-one meetings with Japanese investors. BAML also drummed up demand totalling more than $4 billion for Central Japan Railway’s five-year $600 million bond with a series of “railshows” targeting Asian and European asset managers and banks.

It was also able to make the most of long-standing ties with many regular Japanese issuers in the Supranational/Sovereign/Agency space, managing multiple mandates that included a July dual tranche of $3 billion and an October $2.8 billion dual tranche for the Japan Bank for International Cooperation (our Best Issuer for the year). The US bank in addition served as joint bookrunner on the $1.65 billion dual-tranche Reg-S offering in August by Development Bank of Japan and the Japan International Cooperation Agency’s $500 million offering in October, It’s worth noting that much of this issuance came just before the US presidential election, a period of high volatility for the market.

Best House for Foreign Issuers
Mizuho Securities

New players, longer tenors and total loss-absorbing capacity (TLAC)-eligible securities all characterised foreign issuance this past year, with Mizuho Securities in the lead on many of the deals, earning it the Best House for Foreign Issuers award.

Mizuho took a commanding 21.2% share of the Samurai market for the last fiscal year, serving as bookrunner on 15 deals. The firm was also top of the rankings for the emerging PRO-BOND market being promoted by the Japanese government.

Notable new entrants included Chinese financial powerhouse CITIC Group, with a four-tranche ¥100 billion bond that is expected to serve as a model for other Chinese issuers.  Multiple roadshows by Mizuho and the other joint lead managers helped to build up demand for the firm, which last came into the Samurai market in 1996.

Elsewhere, HSBC issued the largest-ever public yen bond by a European financial group. With Mizuho serving as joint lead manager, HSBC overcame the uncertainties created by the UK’s Brexit vote with inaugural five-, seven-, and 10-year Samurai tranches totalling ¥181.8 billion.

After a relatively quiet year for Samurai bonds demand has surged in recent months, suggesting 2017 could be the start of something bigger – thanks in part to the Bank of Japan. While US interest rates are widely expected to rise as the economy kicks into a higher gear, Japanese rates are effectively locked in place by the BOJ, keeping borrowing costs depressed.

On the back of this, French utility EDF made a return to the Samurai market in January, pricing the largest ever 10-year-plus issuance, with four tranches totalling ¥137 billion in an offering also supported by Mizuho

“EDF’s transaction symbolises the beginning of a new era in the Samurai market, pushing boundaries in terms of tenors and jumbo size,” Mizuho said of the deal. Also joining the January rush, France’s BPCE priced three-tranches totalling ¥142.7 billion in Senior Non-Preferred and Senior Preferred Samurai Notes while insurer Aflac raised ¥60 billion via a 10-year Global Yen bond, both jointly led by Mizuho.

Best Issuer
Japan Bank for International Cooperation

Ambitious foreign policy goals require deep pockets. The drive by Prime Minister Shinzo Abe to give Japan a higher profile on the global stage has meant more projects – and therefore funding needs – for our Best Issuer, the Japan Bank for International Cooperation.

The bank was spun off from Japan Finance Corp. in 2012 and took over the foreign financing operations of its former parent. It has become a driving force in the Abe government’s programme to invest in overseas infrastructure projects and provides funding to Japanese companies that operate overseas in both direct investment and M&A.

Issuing and lending in foreign currencies, JBIC issued $2 billion in three-year bonds in February, part of a broader $10.3 billion fundraising programme for the year. That is a quantum leap from the $3.5 billion in bonds floated in the two previous fiscal years.

The way the proceeds are being used is wide-ranging. The bank recently announced a programme to support Japanese small- and medium-sized companies interested in joining their larger brethren in investing overseas. It is also backing Japan’s first loan to Iraq since 1986 and in December announced a joint $1 billion fund with Russian sovereign wealth fund, the Russian Direct investment Fund, to facilitate better economic ties with Moscow.

Best Law Firm
Davis Polk & Wardwell

In any financial transaction, lawyers have the job of making sure there are no unknown risks for their clients amid urgency to get the deal done. Our Best Law Firm, Davis Polk & Wardwell, demonstrated that it can help firms meet those two goals, as demonstrated in some of the year’s major transactions.

The firm of eight attorneys in Tokyo, a small group compared with some other big Western shops in town, went to Olympian lengths to advise the Tokyo metropolitan government on its first-ever US-directed bond offering for $1 billion in a five-year tenor. The issuance took place amid considerable turmoil over the city’s plans for the 2020 Olympics and Paralympics, which resulted in the resignation of the Tokyo governor just after the deal closed in May. The firm fortunately has a long history in helping Tokyo out in difficult times. Its first Japan-related work was in the 1920s, when its New York office helped with reconstruction finance after the Great Kanto Earthquake of 1923.

Like other foreign firms Davis Polk first opened shop in Tokyo 30 years ago when Japan started to loosen regulations on legal services. In 2015, it bolstered its capital market presence, which is reflected in some of the big mandates earned over the review period. Among them is its support for TLAC-compliant notes issued by Sumitomo Mitsui Financial Group and by Mizuho, which together totalled more than $20 billion as the banks further strengthened their capital base ahead of new rules.

On the equity side, the firm advised sushi restaurant chain Sushiro on its IPO of 19.1 million shares by European buyout group Permira. It also advised the international managers when Bain Capital exited from MACROMILL, the market research group.

The firm also had a hand in our Deal of the Year, advising British chip firm ARM Holdings in relation to US legal issues on its $31.8 billion sale to Softbank, the largest ever sale of a UK technology company.

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