Nomura stung by Madoff

But a Ñ300 billion bond offering, which closes on December 25, is reportedly unaffected.
A Nomura source has told FinanceAsia that Nomura's Ñ300 billion ($3.2 billion) bond offering, which opened last Friday and closes on Christmas day, has so far not been affected by the investment bank's exposure to the failed New York securities firm of Bernard Madoff. According to an official statement released by Nomura Holdings yesterday, the exposure amounts to Ñ27.5 billion, which it ruled as ænon-materialÆ. However, given it is only the second day of the offer period, it will be interesting to follow developments over the next few days.

Bernard Madoff was arrested last Thursday in New York for allegedly creating a Ponzi scheme via his firm Bernard L. Madoff Investment Securities. Total losses could reportedly amount to $50 billion. A wide range of international investors, including Banco Santander, BNP Paribas and Access International Advisors, have announced multi-billion dollar losses related to the collapse of the securities firm.

Nomura has not disclosed which part of its operations was exposed to Madoff. One observer says he believes it was structured products and funds of funds sold to investors which have been hit. However, another observer says that, in that case, Nomura would not have to compensate its clients. öFrom the way the press release is phrased, it seems as if Nomura Holdings itself will suffer the losses,ö he says. A third possibility is that Nomura provided financing to its clients to invest with Madoff.

The Nomura bond issue is self-led, which raises the question of a conflict of interest. Investors could normally complain to the underwriter, who could side with the investors and refuse to sell the issuerÆs bonds, if he believes that a 'material change' to the offering has occurred. Investors can still complain but it will likely have to be through different channels.

A foreign lawyer based in Japan says investors would be eligible to change their mind about buying the bonds if material new information had come to light. Whether or not new information is considered æmaterialÆ is usually left up to the issuer to determine in consultation with its advisers, he says, adding that ôregulators don't usually take an active role unless a formal complaint is made, in which case the regulator might investigateö.

A second foreign lawyer estimates that the Nomura loss does not constitute a material loss in the ônormally accepted sense of the wordö.

Apart from legal issues, simply supply and demand are important factors. The extent to which investors might negotiate a sweeter deal depends on the demand for the bonds. Currently, the bonds offer a coupon of 3.6%, have an eight-year maturity, and have been predominantly marketed to NomuraÆs high-net-worth retail base. This is a good coupon by Japanese standards, says a foreign banker. A recent $1.1 billion bond offering from leasing and financial services firm Orix, is paying just 1%. ôThat makes the Nomura coupon pretty attractive,ö says the banker. ItÆs not currently clear how much investor interest there is in the Nomura issue.

A quirk of the Japanese market is that although the payment date is December 26, retail investors put down a deposit when they express interest in the offer. However, the deposit usually amounts to the same value as the total subscription price, rather defeating the original purpose of a deposit, which is to reduce risk.

The Nomura source says that ôit was debated whether to add an extra page to the offering circular, but it was eventually decided not to. Concerned investors can talk to their sales persons at the branch offices about the situation. But given that the scale of the loss is small, we do not think it will cause a problem.ö

Ehsan Syed, who covers securities companies for Fitch Ratings in Tokyo, concurs about the small scale of the loss, estimating that it represents only around 1.5% of NomuraÆs total capital. But then he adds: ôWho knows how many other Madoffs are out there in the market."

Indeed, the reputation of the US Securities and Exchange Commission (SEC) is being dragged further through the mud by the latest revelations. The impact on the markets could be negative if investors stop believing that their money is being properly guarded by the US regulators.

The Nomura losses, if they did indeed come from the principal side, can be added to many other such losses this year. Nomura has announced losses from its private equity investment in Fortress Investment Group in the US, and from bets on Icelandic banks that went wrong. The foreign banker notes that Nomura's takeover of Lehman Brothers' operations and staff in Europe and Asia is also costing the firm a lot of money. Some bankers suggest that salary costs in Asia and Europe combined amount to some $200 million per month.

Nomura announced losses of Ñ150 billion for the six months ending September this year. Clearly, these are times when sticking to its strong agency operations makes most sense for Nomura.
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