Japanese Bank Shinsei Raises $508 Million

The troubled bank increases its core capital ratio by just 0.5% following the issue. Interest payments on the new securities will weigh on earnings

Shinsei Bank has marked the return of president and CEO Masamoto Yashiro by raising ¥48.2 billion ($508 million), which should have a beneficial impact on its tier-1 capital adequacy ratio. However, the improvement will be only in the order of 0.5%, according to one analyst. In addition, the bank's tumbling earnings will have to stretch to cover roughly ¥2 billion of annual interest payments on the new securities.

The transaction, which was placed privately, comes in four tranches issued by two overseas special purpose subsidiaries. The first subsidiary is issuing one ¥19 billion tranche of non-cumulative perpetual preferred securities with a 5.5% coupon until July 2014. The rate will become floating after that date. The second tranche by the same subsidiary amounts to ¥20.1 billion and carries a 5% coupon until July 2019 when the securities become callable. If Shinsei doesn't call the issue, the coupon will step-up and become floating.

The second overseas special purpose subsidiary has issued a further two series of non-cumulative perpetual preferred securities to the value of ¥2.5 billion and ¥6.6 billion. The ¥2.5 billion tranche will pay a dividend of 5% until July 2019 (when it will step-up and switch to a floating rate), while the ¥6.6 billion tranche will pay 5.5% until July 2014 (this tranche has no step-up, but will switch to a floating rate thereafter).

The proceeds will be used to "strengthen the tier-1 capital base of Shinsei Bank", according to a press release. Shinsei's tier-1 capital adequacy ratio was 6.64% as of December 31, 2008. According to a Nikko Citi research note dated March 6, the capital raised is at the bottom of the expected range. "We think Shinsei will boost tier-1 by at the most a few tens of billions of yen. If we assume ¥50 billion-¥90 billion, the tier-1 ratio would rise by 0.5%-0.9%," the report states.

A second bank analyst says the new capital adequacy ratio,is not impressive compared to its global peers, which are raising their tier-1 capital levels to over 10%. But he adds that with Shinsei's asset quality coming under pressure, the capital raising is a welcome move.

The international regulatory standard for tier 1 capital is 4%, meaning Shinsei exceeds that level, and is well in excess of the domestic tier 1 regulatory standard, which is 2%.

Reiko Toritani, senior banking analyst at Fitch Ratings in Tokyo, points out that "increasing common tangible equity is preferable. However, from a credit analyst's point of view, preferred securities are still subordinated to senior/ordinary debt and can (thus) to some extent absorb hits to its capital base."

Indeed, a long debate in the US regarding the health of banks has concluded that traditional Basel safeguards are inadequate, and that a better gauge of a bank's ability to absorb hits to its capital is its tangible common equity to tangible assets ratio. Further, the step-up coupon in the Series B (which implies the banks will call the issue) may mean that Shinsei will have to bolster its capital again, if its earnings don't improve.

In addition, the roughly ¥2 billion in interest payments will come directly out of Shinsei's earnings, which will also weaken the capital base. Shinsei announced a net profit of ¥60 billion in the 12 months to March 2008, but a credit report from Credit Suisse estimates that the bank will lose ¥60 billion in the 12 months to March 2009, and make profits of just ¥5 billion and ¥7 billion in the coming two years.

On the plus side, the 5% coupon looks like a triumph compared to the almost 15% charged to Mizuho Financial Group, Japan's second largest bank, which offered $850 million in preferred securities last month. Mitsubishi UFJ also issued ¥97.4 billion in preferred securities on March 12, but will pay just under 5%.

One banker not connected to the deal says that doing a private placement is a good solution in a volatile market, where the period between marketing and pricing the deal can result in hedge funds shorting the stock, and then covering their positions by buying into the deal. In addition, investors are bound by confidentiality agreements, meaning the issuer can share sensitive information with them. "Being able to use confidential data to make a great pitch means the issuer can beat investors down on price," he says.

Sources at Shinsei claim the deal was a testament to the strong relationships the bank has with key business partners (although these were not named). One possibility is that returning president Yashiro (who replaced the disaster-prone, former CEO Thierry Porte in November 2008) was able to tap his high prestige within the Japanese business community. Yashiro is a historic figure in the financial community, as the CEO who helped lead Shinsei after it was acquired by US private equity group Ripplewood in 2000.