Remain Calm and Hire Bond Bankers Is Mizuho Negative Rates Plan

  • `We can't panic,' says Mizuho head of global capital markets
  • Business may add 10 people in Japan this year, Fukushi says

Mizuho Financial Group Inc. plans to boost staff for underwriting debt as the Bank of Japan’s negative rates policy drives investors to seek riskier notes such as capital-boosting securities.

Mizuho’s investment banking unit may add about 10 people in Japan this year for its capital markets business that advises public companies on debt and equity funding, according to Yutaka Fukushi, the head of global capital markets at Mizuho Securities Co. While companies may favor loans over bonds after the BOJ penalized banks for holding cash, sovereign yields below zero will force investors to consider new fixed-income assets, he said.

“Issuers won’t forget it if we are there to help them in this difficult time, so we can’t panic,” said Fukushi in an interview. “What we have to do now is pass on information about developments in the market and with investors together with conceivable proposals.”

Sales of Japanese corporate bonds have climbed 18 percent to 1.34 trillion yen ($12 billion) this year as banks and insurers sold higher-paying subordinated debt to boost regulatory buffers, and the developer Mitsubishi Estate Co. issued notes that can count toward equity. The drop in yields on sovereign bonds below zero may prompt some investors to expand into notes from government-backed organizations that still offer positive yields, according to Fukushi.

Yield premiums on Japanese corporate notes have increased 15 basis points in the past year to 37 basis points, the widest in more than 2 1/2-years, as the drop in sovereign yields outpaces the decline in those of company debt, according to Bank of America Merrill Lynch data. Sovereign notes as long as 10 years have negative yields after BOJ Governor Haruhiko Kuroda’s rate cut.

That’s dragged down coupons on government-backed organizations to levels just above zero. The Development Bank of Japan issued 20 billion yen of six-year notes at 0.001 percent on Feb. 19.

The BOJ’s move to a negative-rate policy has roiled Japan’s $14.1 billion money-market fund industry, with the 11 main firms in the business halting new investments into their funds. Investment managers have halved the proportion of assets they hold in domestic bonds to 15 percent over the past five years, according to data as of Sept. 30 from the Japan Investment Advisers Association.

“There is a huge demand now for bonds that have even a little bit of positive yield” such as municipal notes or debt from government-backed entities, said Yutaka Ban, a chief credit analyst at SMBC Nikko Securities Inc. “A lot of investors are interested in buying subordinated debt.”

Bank Bonds

Ban said bond issuance from financial institutions to meet regulatory requirements may help offset a lack of funding needs among regular companies.

Mitsubishi UFJ Financial Group Inc., Japan’s largest bank by market value, plans to sell as much as 400 billion yen in subordinated bonds to investors this week, in two separate deals targeting institutional and individual investors respectively. Nomura Holdings Inc., Mitsui Sumitomo Insurance Co. and Mitsubishi Estate have already issued more than a combined 550 billion yen this year in such debt, which are paid after senior notes in case of a default, according to data compiled by Bloomberg.

Japanese issuers offered 2.24 trillion yen of junior bonds to investors at home last year, the most in six years, the data show. Japanese banks and insurers have also sold more than $10 billion in similar debt in U.S. dollars since 2014 as they seek to meet stricter regulatory requirements. Mitsubishi UFJ Financial Group separately sold $5 billion in dollar-denominated senior notes Tuesday that may be subject to losses if the lender needs to be resolved and count as buffer securities.

Mizuho Deals

Mizuho co-managed a $1.5 billion sale by Nippon Life Insurance Co. last month, as well as underwriting deals by Fukoku Mutual Life Insurance Co. and Meiji Yasuda Life Insurance Co. in 2015. Mizuho’s Fukushi said he sees more potential for dollar-denominated sales by Japanese issuers seeking diversification and a larger investor base than at home.

Mizuho is the 11th-biggest underwriter of U.S. corporate debt sales this year, with $6 billion of deals, compared with the equivalent of $1.7 billion in its home market, according to data compiled by Bloomberg. The Japanese bank underwrote $33.3 billion in U.S. corporate debt last year, almost three times the figure it managed in Japan’s domestic corporate bond market, where sales dropped 28 percent, the data show.

“For us, generating cross-border business is becoming increasingly important, with an emphasis on the Japanese and U.S. markets,” said Fukushi.

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