Japan banks target growth in cooling U.S. high-yield debt market

div classBodysc17zpet90 cdBBJodivpBy Makiko Yamazaki and Yuki Nittap

pTOKYO Reuters – When Japans biggest banks helped finance a 34 billion deal last year for medical supply maker Medline, one of the largest leveraged buyouts since the financial crisis, the famously cautious lenders signalled their ambitions in riskier, and more lucrative, lowgrade U.S. debt.pdivdivdiv classBodysc17zpet90 cdBBJodiv

pMitsubishi UFJ Financial Group Inc, Mizuho Financial Group Inc and Sumitomo Mitsui Financial Group Inc, eagerly hunting yield abroad after years of zero rates at home, have beefed up U.S. operations and are now targeting business there lending to lowerrated borrowers and underwriting junk bonds.p

pBut their timing – when interest rates are rising and the highyield debt market is slowing – means they will face increasing risks and dwindling opportunities, testing their staying power.p

p“We‘ll need to closely monitor the course of the markets following the latest contraction,” said Shinichi Sato, an executive officer at Mitsubishi UFJ, Japan’s biggest lender.p

pHe was nevertheless positive about the prospects: “The market for noninvestment grade financing will likely remain on a growth trend.”p

pThe big Japanese banks still have a long way to go to become major players in the market.p

pMitsubishi UFJ, which has a tieup with Morgan Stanley, had a 1.6 share of the estimated 18 billion fees in the noninvestment grade debt market last year, according to Dealogic, the most of any Japanese bank.p

pIt aims to move up five spots in the league table for noninvestment grade bonds and loan syndication in the next two years, to 12th place.p

pLOCAL KNOWLEDGEp

pBecause noninvestment grade borrowers are seen as more likely to default, deals require closer attention to local conditions, bankers say. p

pDeveloping that expertise has been a challenge for Japanese banks, requiring more reliance on local staff and adoption of a fastermoving business culture, they say. p

pMizuho has expanded its presence in the United States following its 2015 acquisition of Royal Bank of Scotlands North American corporate loan portfolio, where it also brought on board some 150 former RBS bankers.p

p“U.S. banks and investment banks are cutting edge in terms of their business models and governance, and we have developed our presence with talented bankers joining Mizuho,” said Yusuke Kasamatsu, a senior Mizuho banker.p

p“We took on board their perspective and raised our game.”p

pIt bolstered ties with investmentgrade clients and then reached out to lowerrated borrowers as it deepened its knowledge, Kasamatsu said.p

pRivals took notice when Mizuhos profits from the U.S. business surged in 2020, said a senior executive at another megabank.p

p“The RBS deal changed their culture,” the executive said, declining to be identified because of the sensitivity of the topic. “They sped up the due diligence process and beefed up risk control. The former RBS bankers told them what needed to be changed and they listened.” p

pIts U.S. securities business more than doubled earnings to 60 billion yen 467 million in the year through March 2021, after trebling a year earlier.p

pIts share of the highyield fee pool is 1.5 and has doubled in three years, according to Dealogic. p

pSumitomo Mitsui last year took a 5 stake in Jefferies Financial Group Inc, in part to target highyield deals.p

p“As our U.S. capabilities were weak, we couldnt benefit fully from the buoyant capital markets” that helped boost Mizuho, Sumitomo Mitsui CEO Jun Ohta said in a December interview. p

pNEW RISKSp

pBut the expansion in the United States, and especially in the highyield debt market, will pose new risks for the big lenders.p

pThe Bank of Japan has taken notice, saying exposure to highrisk assets, while small, could saddle lenders with unexpected losses.p

pAs the banks pursue greater fee revenues, they need to “assess the quality and risks of their portfolios”, the central bank said recently.p

pWhile Japanese financial institutions generally hedge against the risk of default by selling on the loans in the secondary market, they have been stung on Wall Street before.p

pIn last years collapse of hedge fund Archegos Capital, Nomura Holdings took a 2.9 billion hit. During the subprime crisis, Mizuho was the worst hit of the Japanese banks, losing some 6 billion. p

pAt the regulatory Financial Services Agency, an official said it was “reasonable” for the banks to enter the highyield market overseas after gaining investmentgrade debt experience.p

p“Its also important to strengthen the risk control framework in line with their strategies, and were closely watching it,” said the official, who declined to be identified by name.p

pThe banks need to know how much risk they can withstand in times of market distress, said Rie Nishihara of JPMorgan Securities in Japan.p

pIn such cases, there is a difference in speed between top and secondtier banks in accessing information, she said, pointing to the Archegos collapse, where toptier investment banks emerged relatively unscathed.p

p1 128.3900 yenp

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pp Reporting by Makiko Yamazaki and Yuki Nitta Editing by David Dolan and Edmund Klamannp

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