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Last updated: March 25, 2014 8:04 am
Mizuho Financial Group has become the first of Japan’s banks to sell a “bail-in” bond that would force losses on investors if the group were to hit serious trouble.
Since the global financial crisis, regulators around the world have urged banks to issue debt capable of absorbing losses so as to relieve the burden on the taxpayer in the event of state-led bailouts. Such bonds are also thought to encourage investors to hold executives to better standards of risk management.
Mizuho’s $1.5bn subordinated bond, to be issued to global investors on Thursday, is the first following an overhaul of Japan’s deposit insurance laws last year after which the Financial Services Agency was given enhanced powers to inject capital into bust banks, securities brokers and insurance companies.
The 10-year bond will offer a high fixed coupon of 4.6 per cent – about 190 basis points higher than the current US Treasury bond – but will be instantly and permanently written down to zero if Japan’s government deems the bank insolvent either as a precursor to a recapitalisation or the start of bankruptcy proceedings.
That means holders of the bonds are more likely to take losses than they would in a traditional bankruptcy, in which courts have discretion over write-offs.
Other Japanese banks are expected to follow suit in issuing the debt, which can be counted as Tier 2 capital under Basel III rules.
Sumitomo Mitsui Financial Group, the third-biggest Japanese banking group by assets, said on Tuesday that it was planning a sale of dollar-denominated bonds with similar features.
Naoko Nemoto, a banks analyst at Standard & Poor’s in Tokyo, said the instruments are a gentler, peculiarly Japanese version of the “contingent convertible” bonds that many banks have sold around the world in recent years, which either convert to equity or are written off altogether if a bank’s capital drops below certain thresholds.
October, 2013: Yasuhiro Sato, president and chief executive at Mizuho, Japan’s second-largest lender, tells journalists that the president of the banking unit will resign and that he will take a pay cut to atone for the bank’s links with Japan’s Yakuza gangsters
Unlike banks in the US and the EU, where authorities continue to grapple with the after-effects of the 2008-2009 financial crisis, Japan’s lenders emerged from the Lehman shock in relatively good health, topping up Tier 1 capital in a series of equity raisings in 2009 and 2010.
The change to the law in Japan was prompted by an IMF report in the summer of 2012 that noted that while the country’s financial system appeared sound, it lacked a clear system-wide “safety net” for depositors, investors and insurance policyholders.
“Because the financial industry is so interconnected, we needed to prepare for a so-called market-based shutdown,” said an executive at the Japanese Bankers Association.
The country’s own banking crisis – a legacy of the asset-bubble of the late 1980s – peaked in 2000, when 20 lenders received a total of Y5.2tn ($51bn) in grants from the Deposit Insurance Corporation of Japan. All told, there were 171 cases of financial assistance between 1996 and 2002 involving grants of Y17.9tn. On top of that, the DICJ bought assets worth a total of Y6.4tn.
Since 2003 the DICJ has made grants of just Y302bn and bought assets of Y55bn.
S&P has rated the Mizuho bonds BBB+, one notch below the bank’s existing subordinated debt and two notches below the standalone credit profile of the main operating entity.
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