Deal of the Year and M&A Deal of the Year
Ripplewood's Y261 billion LBO of Japan Telecom
Advisers to Ripplewood: Goldman Sachs, JPMorgan. Adviser to Vodafone/Japan Telecom: UBS.
Finance provided by ABN Amro, Bank Of Tokyo-Mitsubishi, Citibank Credit Lyonnais, ING, JPMorgan Securities Asia, Mizuho Corporate Bank, Sumitomo Mitsui Banking Corporation, The Norinchukin Bank, UFJ Bank and WestLB.
This deal was a landmark event in Japan when it was announced in August, becoming the largest LBO or private equity acquisition ever to happen in Japan. The deal saw Vodafone sell the fixed line business of its Japan Telecom acquisition for Y261 billion to Ripplewood, thus allowing Vodafone to concentrate on its core, mobile business.
The deal took 11 months of negotiations and was conditional on Ripplewood being able to arrange the complex financing package. Critics say that there was not much Japanese about this deal, characterizing it rather as a shuffling of Japanese assets by foreigners.
Indeed even the documentation was in English. But the strong presence of Japanese lenders in the loan group gives this deal that stamp of approval from Japan Inc. That such approval was given shows the Japanese market is ready to accept deals where financial sponsors are the main protagonists.
The financing package saw 11 mandated lead arrangers lend Y224 billion in four tranches: a five year, seven year, a seven-and-a-half year, and a revolver. The package was structured to international standards with standard LBO covenants. It was syndicated out to a further 10 banks.
The package allowed Ripplewood to make another jumbo investment in Japan, along with its holdings of Shinsei Bank, Seagaia Resort, Niles Parts and Nippon Columbia/Denon. Deals such as this do a lot to restore international confidence in Japanese investments and show that global best practices can be fully integrated into the Japanese financial markets. It also goes a small step to achieving some much needed consolidation in Japan's bloated telecom sector.
It is one of those deals perhaps, whose significance will not be seen for a few years, when it becomes apparent if it was a benchmark for future deals to come. The hope is that it will be and as such it is easily the most significant deal of the year.
NEC Electronics Y155 billion IPO
Joint Global Co-ordinators: Morgan Stanley, Daiwa SMBC
NEC's spin off of its non-DRAM chip business became the largest IPO in Japan in 2003 when it priced on July 14. The deal was a highly strategic move for NEC to position its chip business as a debt free pure play against global comparables such as STMicroelectronics. The move was welcomed by investors who took to the new company with gusto.
Overall demand led to a 21 times oversubscription level with institutional investors oversubscribing for their portion by 32 times. Having priced at Y4200, the top of the indicative rage, the shares surged a further 29% on the first day of trading and have continued the positive march upwards, ending the year at Y7840, an increase of 86%.
Arguably the deal achieved the most global spread of investors ever for a Japanese offering and created a truly global company with strong Japanese roots. This was reflected in the breakdown of the allocations, which saw domestic retail take 30% of the issue, domestic institutions taking 25% and international institutions taking 45%, after an increase from an initial target of 40%. Such an increase in the international tranche is very rare for a Japanese equity issue and is testament to the quality of the deal.
The IPO was the latest in a string of actions by NEC over recent years to restructure the company and improve its share price. It was particularly bold because the business lines that were spun off in NEC Electronics accounted for 40% of NEC's consolidated EBITDA.
But moves such a this show how NEC now embodies all the best of Japanese technological skill and corporate culture along with global best practices in its corporate finances.
Best Secondary Offering
Mitsubishi Tokyo Financial Group Y306.2 billion follow on offering
Joint Global Co-ordinators: Morgan Stanley, Nomura
This deal showed that the arts of innate salesmanship and calling the market are far from dead in the world of Japanese banking. On March 3, Nomura and Morgan Stanley priced a Y306 billion ($2.6 billion) follow on offering representing 9.3% of the total shares outstanding in Mitsubishi Tokyo Financial Group (MTFG), one of Japan's largest banking groups.
The deal was priced at a slim 2.06% discount to the spot price, right at the tight end of the range of 2%-4%. Using a novel global public offering structure the deal had three tranches for domestic investors, US investors and investors from the rest of the world.
The deal was the first common stock offering by a Japanese bank in over 13 years and completely changed the tone for the Japanese banking sector. The deal sent a very strong signal to the global markets that Japanese banks could recapitalize themselves with their own equity. Furthermore the structure of the deal removed the overhang from cross shareholdings among the affiliated banks within MTFG.
The detailed sales presentation by the global co-ordinators also allayed investors' fears about MTFG's NPLs, its loan growth and its profitability. Indeed, most placements are done at the top of the market, but this deal successfully called the bottom of the market for MTFG's shares, with the stock rising 82% since the deal was launched.
The quality of the transaction is one of the reasons behind the renaissance in Japanese banking sector in 2003. That rebirth has given the whole Japanese economy a shot in the arm.
China Steel Corporation GDR Issue
POWL Co-ordinator: Nomura
Public Offers Without Listing (POWLs) are now a staple of Asian equity deals, keen to tap the vast retail investor base in Japan. In 2003, demand from these investors was such that virtually all the major equity deals from Asia had some form of POWL component. While other deals such as Chunghwa Telecom and Singapore Post, successfully tapped this market, China Steel's POWL really showed the value of this Japanese angle and represents the first ever GDR with a retail component.
The POWL led the deal in terms of demand and pricing. Where the global co-ordinators - Citigroup and UBS - went out with an initial pricing level of 5%-10% discount to spot, POWL investors were only looking at 1%-3% discount. Nomura's extensive use of its massive sales force of 2,800 brokers saw it target some 3.4 million retail accounts, using satellite TV broadcasts, conference calls and internal meetings. So successful was this marketing that over 50% of the POWL orders came in at a 1% discount or less.
In total there was demand from Japan for some $500 million for a deal that was only $815 million. The leverage this gave the leads enabled them to tighten the indicative range, with final pricing coming in at a 3% discount to spot.
The POWL was given a 15% allocation.
Best Equity Linked Deal
Sony Corporation's Y250 billion Euro-Yen CB
Joint Bookrunners: Goldman Sachs, Merrill Lynch
There have been many equity linked deals in Japan this year as companies look for investment finance and investors seek growing exposure to corporate equity with the downside protection of bonds. Conversion premia have been going up and tenors have been lengthening.
Of all the deals this year, none have been as adroitly completed as Sony's Y250 billion behemoth sold in December. The zero coupon deal was sold with a 47.5% conversion premium and was two times oversubscribed. The deal didn't damage the underlying stock as so many other deals have done. It was also the biggest convertible out of Japan since May 2002.
What really stands out is that the deal is a crucial component to the restructuring of Sony as announced by CEO Nobuyuki Idei in October. The deal terms are allied to the goals of the restructuring (called Transformation 60) by, for instance, creating a contingent conversion structure based on the results of the restructuring and a soft call feature after three years when the profit goals of the restructuring become more apparent. Where other Japanese CBs have suffered for having unclear use of proceeds, this deal clearly stated that the money was going to invest in semiconductors and convergence strategies. Such transparency allowed investors to make a clear decision on the deal. Allied to a highly professional bookrunning exercise, the deal was a huge hit. If the underlying restructuring goes as well as this deal, the Sony will really have started something.
Best International Bond Deal
UFJ Finance Aruba $600 million 8.75% perpetual subordinated notes
Joint Bookrunners: Merrill Lynch, Goldman Sachs, UBS
One of the main themes of 2003 in Japan was the rehabilitation of the Japanese banking sector. At long last the sector turned the corner, allowing some interesting strategic capital raising exercises to come to market.
UFJ's upper tier 2 perpetual notes issue was the first public dollar denominated upper tier two deal the bank had ever done. It was launched after a relatively poorly performing similar issue by Sumitomo Mitsui Banking Corporation had quieted the market.
But the strategy of aiming at Asian high net worth individuals, who tend to be very coupon conscious, led 88% to go to Asian accounts, who appreciated the 8.75% they would be earning in the low interest rate environment.
The order book was four times oversubscribed and the deal priced at the tight end of the range. Priced at par, the deal nevertheless quickly improved in the secondary market settling at the 101.5 level in the days following launch. The deal achieved UFJ's aim of diversifying its sources of funding while also bolstering its balance sheet. Investors in turn were drawn by the perpetual rates on offer by a liquid and well-known credit. As more Japanese borrowers look to Asia for financing, this deal will be the benchmark they will follow.
Best Samurai Bond
Volkswagen Financial Services Y50 billion Samurai due 2008
Joint Books: Mitsubishi Securities, Daiwa Securities
Much like Volkswagen's new off road vehicle, the Touareg, VW Financial Services November Samurai bond had to overcome some pretty tough terrain to succeed. The leads were at the end of the marketing process, settling on a price and collecting orders when Moody's put the European parent, VW, on review for a downgrade.
But the strength of the institutional investor response for VW's first Samurai since 1997 persuaded the banks and the company to forge ahead with what became a very successful issue.
The deal was eventually priced flat to VW's Euro deals on a swapped basis and sold to around 60 institutional accounts. This was at the tight end of the range and even allowed the bond's size to be increased from Y30 billion to Y50 billion.
The deal achieved VW's aim of diversifying its funding sources at competitive rates, while offering Japan's Samurai investors the first real corporate deal of the year. The leads and VW took a very systematic approach to the issue, including a roadshow featuring the group treasurer of the company, to explain VW's credit profile.
Such attention to the Japanese investor base and the success of this deal should prove beneficial for ongoing Japanese funding exercises.
Best Securitization deal
Hydra Series I Y89.2 billion MBS
Shinsei Bank Group
The securitization market in Japan has thrown up some interesting deals this year in a variety of asset classes and structures. When Shinsei Bank's Hydra Series I deal came out in March it pushed back the boundaries of the risk structures used in previous RMBS deals in Japan.
The deal is comprised of housing loans from a variety of Japanese institutions that are pooled together before being repackaged as bonds. What is interesting is that it was the first time that multiple originators of residential mortgages had been pooled in such a structure and it was the first time that both performing and non-performing collateral had been included in one deal.
Furthermore the deal carried a unique two tiered structure in which multiple waterfalls are used to repackage the cash flows from the underlying performing and sub performing residential mortgage loans. This was designed to mitigate the risk of contamination between asset pools if one asset went bad.
The deal was heavily structured, complex and novel, but Shinsei's sales efforts paid off handsomely with the deal being fully placed to local insurance companies, funds and regional banks. The efforts involved in this investor education and the subsequent success of the deal, allowed Shinsei to repeat the exercise later in the year when they sold the Y97billion Hydra Series II.
Most Innovative Deal
Akihabara UDX Building construction financing
Financial adviser to the project: Nomura
Visitors to Tokyo in recent years cannot fail to notice the crop of new buildings sprouting up. One such project being built is the Akihabara IT Centre UDX Building, sponsored by NTT Urban Development Co. and Kajima Corporation.
The financing package for this project was the first time that securitization had been used in a large-scale construction project in Japan. The financing involved Y27 billion of domestic bonds sold to domestic investors, a Y27 billion senior syndicated loan and a Y3 billion mezzanine loan.
All the bonds and loans were snapped up by investors and regional banks and allocations for the loan had to be scaled back. Nomura underwrote the bonds, arranged the loan and arranged a swap for the deal.
The bonds are expected to mature in March 2008, two years after the building has been completed when the sponsors expect to fully securitize the building to refinance the loans. This innovative financing package fits well with the area in which the building is being built.
Akihabara has long been known as Japan's electronics hub where the many shops dazzlingly display the latest technological innovations on their shelves. Now the area can proudly boast an example of financial innovation as well.