Goldman Profits as Abe Spurs Convertible Debt Boom: Japan Credit

Goldman Sachs Group Inc. helped regional Japanese banks sell the most dollar-denominated convertible debt since at least 1999, as the lenders took advantage of a stock-market rally to fund overseas expansion.

The world’s largest underwriter of the notes helped to arrange three of the firms’ five U.S. currency sales in the last 12 months. It co-managed deals by Yamagata Bank Ltd., Bank of Iwate Ltd. and Shizuoka Bank Ltd., whose convertible offering last April was the first by a Japanese company since 2002, according to data compiled by Bloomberg. Goldman had only underwritten seven Japanese convertible-note sales in the decade prior to 2013.

“Convertible bonds have established themselves as one funding tool, so all regional lenders have no choice but to consider them to some extent,” Hiroyuki Sugiura, a vice president at Goldman’s investment banking division at the company’s Japanese unit in Tokyo said in an April 11 interview. They offer the regional lenders cheaper funding, he said.

Prime Minister Shinzo Abe’s stimulus program to overcome 15 years of deflation has spurred a stock-market recovery that has allowed banks to get favorable terms on their convertibles, with the three lenders all selling zero-coupon notes. The regional institutions will use the funds to lend to clients expanding overseas as a shrinking domestic population curtails growth prospects at home.

Quickest Proposal

Goldman Sachs underwrote $330 million of the $1.3 billion of dollar convertible bonds sold by regional banks over the past 12 months, a figure exceeded only by Nomura Holdings Inc. Morgan Stanley, the next biggest overseas manager, managed $120 million, Bloomberg-compiled data show. Nomura, Japan’s largest brokerage, arranged $585 million in debt, including an issuance by Yamaguchi Financial Group Inc.

“Goldman was the quickest in bringing us a proposal,” Katsunori Nakanishi, the president of Shizuoka Bank, said yesterday in an interview. “After looking at the success of our deal, it became easier for other regional banks to follow.”

Sales of convertible notes, which combine a fixed-income security with an option to buy stock, have surged since Abe’s stimulus program sparked a 51.5 percent gain in the Topix benchmark index last year. While the index is down almost 13 percent since the start of this year, it’s still higher than at any point from 2009 to 2012.

Bond Demand

Demand for Japanese convertibles has been 10 to 15 times more than the amount of notes on offer since the beginning of 2014, Takashi Masuda, head of equity-linked products at Goldman in Tokyo, said in the same interview. Outstanding issuances have fallen to about 1.5 trillion yen ($14.7 billion) from about 10 trillion yen in 2000, he said.

Japanese exchangeable-note returns fell 3.9 percent this year, following a 35 percent gain in 2013 which was their best performance since 1999, data from UBS AG show. While the bonds have insulated investors somewhat from stock-market declines, they’re underperforming the 2.3 percent gain in convertible debt globally.

All Japanese companies including Joyo Bank Ltd. sold $900 million in dollar convertibles so far this year, compared with $1 billion for all of 2013.

“There are more than 100 companies in Yamagata with overseas operations and we will use the money to help meet their funding needs,” said Nobuhiro Konno, the manager of the general planning and coordination division at Yamagata Bank, based in northern Japan.

Sale Catalyst

“Since the sale of dollar convertibles by Shizuoka, Iwate and Yamaguchi Financial, a lot of brokerages came to explain the product, and that was the catalyst for our sale,” Konno said. The bank sold $100 million of five-year convertible debentures this month.

Other regional banks including Nagano Bank Ltd. and Daisan Bank Ltd. have issued yen-denominated convertibles this year, with financial institutions accounting for the biggest amount of sales by sector after industrials.

Shizuoka Bank’s 2018 dollar notes can be exchanged for shares at $13.46, or 18 percent above the closing stock price on April 9, 2013, in dollar terms. The stock traded at the equivalent of $9.31 today. Yamagata Bank shares were at $4.06, compared with a conversion price of $5.09 on its 2019 debt.

“It’s cheap dollars, and all the larger regional banks are trying to increase their U.S. dollar lending as their clients increasingly venture overseas,” Graeme Knowd, an associate managing director who overseas financial institutions at Moody’s Investors Service in Tokyo said in a phone interview. “Given they lend to Japanese corporates, they probably need to fund as cheaply as possible.”

Abe Stimulus

Abe came to power in December 2012 calling for fiscal spending, deregulation and Bank of Japan monetary easing to raise the inflation rate to 2 percent. BOJ stimulus has helped weaken the yen almost 15 percent against the dollar since the end of 2012, bolstering the overseas earnings of Japanese companies.

The yen traded at 101.78 per dollar as of 4:28 p.m. in Tokyo. The benchmark 10-year bond yield was at 0.6 percent, the world’s lowest.

Non-yen-denominated lending by Shizuoka Bank rose 91 percent to the equivalent of 414.4 billion yen at the end of last year, compared with a 5.5 percent increase in total loans to 6.98 trillion yen. The bank said yesterday it will seek to boost lending at overseas branches to $3 billion by March 2019 from an estimated $1.72 billion for the fiscal year just ended as part of a medium-term plan.

Biggest Underwriter

Goldman has been the biggest manager of global convertible bonds for the last three years, underwriting about $14 billion in 2013 including notes sold by Yahoo Inc., Tesla Motors Inc. and Air France-KLM, Bloomberg-compiled data show.

The New York-based bank hasn’t underwritten any yen-denominated convertible bonds since it helped manage Sony Corp.’s 150 billion yen issue in November 2012. Prior to that Goldman helped manage one convertible bond deal each in 2009, 2008 and 2007, by Japanese issuers, the data show.

Convertible sales this year may exceed last year, said Goldman’s Masuda, adding the bank is looking to underwrite both yen and dollar-denominated deals.

“If issuance continues to climb, we’re confident of taking market share,” Masuda said.

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