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Mitsubishi UFJ Financial Group (MUFG)’s plan to strengthen its footing through its massive JPY 990bn (USD 10.5bn) capital raising is likely to be a smooth operation, bankers say.
Some bankers said they believe MUFG will have a far easier time raising funds than rival Mizuho Financial Group (MFG) which raised JPY 1trn in March 2003. One market watcher forecasts that MUFG will find absolutely no problem raising as much as JPY 990bn.
In terms of the type of investors the company is seeking for its planned non-convertible preferred shares totaling JPY 390bn, “MUFG is likely to target Japan’s major life and non-life insurers, such as Nippon Life, Meiji Yasuda Life Insurance and Tokio Marine & Nichido Fire Insurance, along with its numerous corporate clients in Japan,” predicts a syndicate manager at Nomura Securities.
In 2006, MUFG’s close allies Nippon Life and Meiji Yasuda Life bought JPY 100bn each in MUFG’s preferred shares which were issued to the Japanese government in the form of public-fund injections. ”These companies are close allies,” said another banker. “ They would help each other when necessary”.
On 27 October, MUFG said it would raise up to JPY 390bn in non-convertible preferred shares to undetermined investors and up to JPY 600bn in common stock. The offer price of non-convertible preferred shares is set at JPY 2,500 per share, although the share price of MUFG closed at JPY 626 on 30 October. MUFG will pay a dividend of JPY 115 per share.
MUFG has the right to redeem the securities about five years after the issuance at the offer price. Subscription should be made by 14 November with the payment date set for 17 November, according to its press release.
A spokesperson at MUFG said the formal list of investors for the preferred shares will be made available later. He admitted the type of institutional investors it is targeting includes life companies and its corporate clients, similar investors as Mizuho’s capital increase five years ago.
In March 2003, Mizuho Financial Group, which was on the verge of being nationalized due to a mountain of bad debt, scrambled to raise JPY 1trn from as many as 3,368 Japanese companies, including six life and non-life insurance companies, with Dai-Ichi Mutual Life Insurance being the largest investor with JPY 27,000 shares.
At the time, with no way out of the dark tunnel in which it had been trapped for a decade, Mizuho had to knock on the door of almost every major corporate client across Japan for soliciting. “But the situation is totally different for MUFG,” the Nomura official said. “We do not expect MUFG to go through what Mizuho had to do five years ago.” Moreover, unlike Mizuho’s preferred shares, MUFG’s preferred shares are non-convertible into common stock in order to minimize an equity dilution for existing shareholders, the spokesperson said.
As for the issuance of up to JPY 600bn in common stock, MUFG has mandated Nomura Securities, Morgan Stanley and Mitsubishi UFJ Securities as joint lead managers, said a source with the knowledge of the situation. According to FSA’s EDINET filing, the public offering of up to JPY 600bn will be made within a year beginning 4 November, instead of issuing all at once, in order to minimize the possible negative impact on the equity market. The source said further details are expected to be available after the announcement of MUFG’s six-month financial results on 18 November, but a series of the upcoming offerings will be made in Japan as well as overseas.
“This entire capital raising exercise will drive up MUFG’s capital adequacy ratio by about 1%,” according to the MUFG spokesperson. At the end of June, MUFG had a capital adequacy ratio of 10.7%, compared with 11.59% for Mizuho FG and 10.35% for Sumitomo Mitsui Financial Group (SMFG).
Indeed, the weak stock market has been hurting Japanese banks’ capital adequacy ratios especially hard as they have higher stock holdings than their non-Japanese counterparts. Now, Japan’s Financial Services Agency is reviewing the way banks calculate their capital strength. Under the current Basel standard, banks are allowed to account for only 45% of unrealized gains in Tier 2 while the rule forces them to subtract entire unrealized losses after 40% deferred tax from Tier 1. “We have absolutely no intention to skew the Basel agreement. But we are moving to take a flexible measure to minimize this distortion, such as temporarily excluding a portion of unrealized losses from the calculation of Tier 1,” a FSA insider said. The measure has already been included as part of the government‘s special measures aimed at stabilizing financial functions, which were announced this week.
MUFG’s move also follows a series of buying sprees this year, which invested as much as USD 9bn for a 21% stake in Morgan Stanley, USD 3.5n to turn Union Bank of California into its wholly owned unit and JPY 57.3bn to increase its stake to 40% of consumer finance company Acom. Another source familiar with the situation said the decision to invest in Morgan Stanley was positive for MUFG as it was able to clinch a long-awaited financial company holding status in the US, but he has raised an eyebrow as the bank made its decision to acquire Morgan Stanley without adequate due diligence. The MUFG spokesperson, measnwhile, defended that the statement that MUFG failed to carry out adequate due diligence was totally untrue.
A few Japanese media reports speculated that Mizuho FG, SMFG and Nomura Holdings may follow suit. Spokespeople at these financial institutions said nothing has been decided. However, Toyoki Sameshima, an analyst at Goldman Sachs, said the average Tier 1 ratio for these three Japanese megabanks is 7.3%, although they are targeting 8%. “Mizuho FG and SMFG may announce their capital raising,” Sameshima said.
The share price of MUFG closed 6.4% higher at JPY 632 in Tokyo on Thursday. The financial group has a market capitalization of JPY 69.1trn (USD 69.8bn).
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