Mizuho Financial Group is set to raise ¥516 billion ($5.50 billion) in total proceeds, including a greenshoe amounting to ¥36 billion, after selling just under 3 billion of new common stock, according to the company's website. The fundraising comes after Sumitomo Mitsui Financial Group's (SMFG) $8.8 billion follow-on in June, which was the largest-ever capital raising exercise in Japan's banking sector, and Mitsubishi UFJ Financial Group's (MUFG) $4.5 billion follow-on in December.
Bank of America Merrill Lynch, Goldman Sachs, J.P. Morgan, Mizuho Securities, Morgan Stanley, Nomura and UBS are acting as underwriters on Mizuho's deal.
The offer price was fixed at ¥184 per share, which represents a 3.16% discount to Wednesday's closing price of ¥190. Investors have until today (Friday) to decide whether or not to confirm their purchase. In order to maintain their relationships with the underwriters, institutional investors will not refuse their allocations however poorly the stock trades. But some of the retail investors, who make up 90% of the domestic tranche, might. Yesterday the stock finished unchanged at ¥190. The greenshoe will be used by the underwriters to stabilise the price if some of the retail investors bail out.
The reason for the high retail presence, said a foreign banker, is that Japanese institutional investors have a marked bias towards the debt market and do not have much purchasing power in the equity market. By prioritising retail investors in this offering, it is hoped that they will show some more interest for the deal.
The deal was split 50-50 between domestic investors and international investors, with each group taking 1.3 billion worth of shares. In addition to that, there is an overallotment option (or greenshoe) of 195.6 million shares attached to the international tranche.
The international portion was split roughly equal between investors in the US, Europe and Asia and was four times oversubscribed as of Thursday evening, according to a source. The domestic portion was two times oversubscribed.
"Investors bought into this deal pretty much as a macro play," said one banker. "Optimists about the Japanese and global recovery liked this stock because it has the lowest capital level among Japanese banks, and therefore is the most leveraged play on a recovery."
The point about the capital is one the issuer is surely keen to change. The bank's capital ratios have been under stress from a combination of losses, depreciation in the value of the bank's cross shareholdings, and stagnant loan growth. Even for existing loans, the net interest margin is extremely narrow. "If only interest rates normalised, the bank's net interest margin could increase 10 times," one analyst told FinanceAsia.
"Investors have been asking if this new capital is enough. In fact, Mizuho does not need the capital now, strictly speaking. But it's preparing itself for the days when the regulatory regime will be far stricter than it is now," the analyst added.
The deal has come in for some criticism because the amount likely to be raised is less than the amount announced by the bank back in May, when it indicated it would be raising ¥600 billion ($6.4 billion). The reason for the smaller deal size, however, is that Mizuho's share price has declined since then.
A banker close to the deal said that under Japanese regulations, a bank announcing a capital-raising exercise pledges to sell a certain number of shares, not to raise a specific amount of capital. The approximate amount to be raised is calculated simply by multiplying the number of shares with the stock price on the day of the announcement, but this is obviously subject to fluctuation given the lengthy period between the announcement of the deal and the actual pricing. In the case of Mizuho, that period is almost two months.
A Japanese stock market analyst expressed frustration at the predictable pattern in Japan, whereby issuers are sold short in the run-up to the pricing of the new issue by hedge funds and the proprietary desks at the investment banks, which the analyst suspected of working together. Those short positions are then covered when investors receive their stock allocation.
"These guys are making profits on the way down through a form of naked short selling, by artificially forcing down the price, and then making more money when the stock rebounds after they cover their positions," he said. He argued that banks should come out in a more confident manner, with a hard figure at which they will sell the stock, and threaten to cancel the offering if the bears get to work. Other bankers say this contradicts the principle of bookbuilding and price exploration. In any case, it may not be possible for a bank to threaten to cancel the offering if the market knows the issuer needs the extra capital.
Other bankers agree that the short-selling is following a pattern, but note that it happens to everyone. Nomura, which raised $3 billion in March, tried to beat the bears by abruptly moving up the date at which it priced its securities. However, Nomura's share price also fell.
"There are no simple ways around these problems. SMFG carried out what was perceived as a hugely successful share issue, and actually raised more money than it planned, because it issued the fixed amount of shares at a higher price than prevailed when it made the initial announcement. Mizuho's structure was identical to SMFG's. Nomura's strategy, while a clever attempt to ward off bears, raised less than originally calculated. So you can't say Nomura is necessarily the model to follow," said the foreign banker.
In Mizuho's case, the share price has gone down in a straight line since the stock reached a year-high of ¥268 on June 11.
"Ultimately, you can't fight the tide, either in a bear or a bull market. The mood of the underlying market can overwhelm the pros and cons of the individual stock," the foreign banker continued. Indeed, Mizuho's share price initially went up along with the Nikkei index as improved sentiment propelled the index above the 10,000-point level in mid-June. The announcement should have had a depressing effect on the Mizuho stock price because it is dilutive.
Said a second foreign banker: "Mizuho's case was not helped by the fact that you have had a huge number of deals squeezed into the first two weeks of July."
So far, Mizuho has not released a figure indicating how its consolidated capital adequacy level, which stood at 10.55% as of March 2009, will improve as a result of the capital-raising. Roughly speaking, the ¥516 billion of net proceeds from this issue will be added to the ¥6.226 trillion of risk-based capital as of March 2009 for a total of ¥6.742 trillion. Divide that with ¥58.983 trillion in assets, and you get a CAR ratio of 11.43%. Mizuho's tier-1 capital stood at 6.38% in March.
In a Wednesday press release, Mizuho stated that the proceeds would be used to "make investments in (its) consolidated subsidiaries". This refers to the practice of increasing the bank's stake in its subsidiaries to 100% in order to capture all the income.
The bank has previously issued preferred debt securities amounting to ¥303 billion in July 2008, ¥355 billion in December 2008, and $850 million in February 2009 via an overseas subsidiary, according the company's website.
The capital-raising in the Japanese banking sector is by no means over. On Thursday, MUFG announced plans to sell $3.9 billion in preferred securities to further bolster its capital.