Finance

Christopher Langner is a markets columnist for Bloomberg Gadfly. He previously covered corporate finance for Bloomberg News, and has written for Reuters/IFR, Forbes, the Wall Street Journal and Mergermarket.

While Japan was making headlines for negative interest rates, regulators may have quietly handed yields on a plate to bond investors. 

Mitsubishi UFJ Financial Group issued $2 billion of notes in a three-part sale Wednesday at a yield premium some 25 basis points higher than what similar notes from its operational unit, Bank of Tokyo Mitsubishi, were offering in the secondary market. A few years back, there would have been hardly any difference at all. Now, because of new regulations, investors globally are demanding extra payment for holding parent-company debt.

Free Juice
Mitsubishi UFJ's bonds that can take losses offer a premium over ones that can't
Source: Bloomberg

In Japan, though, perhaps they shouldn't. That's because Mitsubishi UFJ, or Mizuho Financial Group, being declared insolvent is unlikely due to government support.

Last year, lenders around the world began adhering to total loss absorption capital rules, standards that stipulated some bank bonds could be written down to zero in the event of an insolvency. In Japan, those rules were announced earlier this month, and come into effect in 2019. As a result, bonds amounting to as much as 16 percent of a bank's risk-weighted assets can be written down to zero if a systemically important institution goes kaput.

From Japan to the U.K., regulators have said that the sort of bonds that can count toward total loss absorption capital are ones issued by a holding, or parent, company. Because the main income of a holding company is the dividends it gets from its operational subsidiaries, creditors of the parent go to the end of the line when it comes to recovery time, which is why those notes pay a fatter premium to compensate for the risk.

Risk Rewarded
Investors are demanding a higher premium to own bonds from the parents of banks in Europe too
Source: Bloomberg

Japan has mostly adopted the latest banking regulations to a tee. However, its deposit insurance law suggests that the government will provide assistance to a bank before it's considered insolvent, the point when all the write downs encompassed in the new financial rules kick in. Simply put, no bank shall be left behind. By proxy, no creditor either. As Fitch noted as early as June 2013, financial institutions in Asia's second-biggest economy will ``continue to receive preemptive financial assistance when necessary.''

In Europe and the U.K., regulators are much more likely to actually impose losses on creditors, something to which bondholders burned by SNS Reaal in the Netherlands or the fallout from Portugal's Banco Espirito Santo can attest.

Over time, markets may start to price in the various regulatory nuances, and Japanese financial institutions may find they needn't pay as high a cost for such debt. Until that happens, there are yields for the taking in Tokyo.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Christopher Langner in Singapore at clangner@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net