Easier investor access
A new bond market established by a joint venture between the Tokyo and London stock exchanges will provide Australian companies with easier access to the professional investor market for bonds or notes in Japan. Michael Davis reports.
The recently launched Tokyo Pro-Bond Market, established by Tokyo Alternative Investment Market and based on the London Stock Exchange’s model, aims to remove historical linguistic and compliance barriers to entry for Australian and other foreign issuers.
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Tokyo sky line
Photo source: Stephanie Claire
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A feature of the new Tokyo Alternative Investment Market (AIM) is simpler regulatory requirements for non-Japanese issuers.
Andrew Reilly, head of Baker & McKenzie’s American capital markets practice in Australia, said this feature, along with an increased deference to home market regulation and English language disclosure, makes the Tokyo Pro-Bond Market “highly attractive” to Australian issuers.
“The advantages are firstly, not having to translate, with the Australian issuer only having to deal in English and two, being able to use the disclosures that they use in US or Eurobond market, without having to include more particular, peculiar Japanese disclosures including the GAAP [generally acceptable accounting principles] reconciliation [requirements],” said Reilly.
Traditional yen-denominated Samurai bond offers – through which Australian issuers had historically accessed Japanese investors and regularly used to hedge foreign exchange rate risk – require local language disclosure that is subject to the country’s regulatory framework.
With Europe and America battling sovereign debt crises and a slowdown in their economic recovery, the new market may provide a viable alternative or supplement for Australian listed companies seeking to diversify sources of funding.
“[It is targeted at] major Australian corporates, because all of them, until the financial crisis, diversified funding sources,” Reilly, who has advises on American Rule 144A transactions and public offers of debt and equity securities at the law firm, said.
“You never know at any point in time where you can get the best terms or which market is open, whether it be the US, Europe, Australia or maybe even Japan.”
He predicted many big Australian issuers who go to market in America and Europe would now look at Japan.
“Now it’s not too difficult and not too expensive,” Reilly said. “Before [the new market was launched, going to market] in Japanese was probably a little too much.
“[Now], I think you’ll find more than just the banks [will try to access the market]. Once one or two deals get done, I think you’ll see corporates looking as well.”
Restrictions on eligibility
There is, however, a trade-off for the reduced disclosure and regulatory requirements. Listing eligibility is limited to corporate bonds that fit within a relatively standard set of criteria, including “plain vanilla” or structured bonds and non-convertible or exchangeable bonds.
A corporate bond is also eligible for listing if the lead underwriter is listed on the lead manager list of the Tokyo Pro-Bond Market and it is rated by a qualifying credit rating agency.
While a rating is required, no particular rating level is required for listing eligibility. Among the qualified rating agencies are Standard & Poor’s, Moody’s, Fitch, Rating and Investment Information and the Japan Credit Rating Agency.
The ratings assigned to the bonds or program by the credit rating agency is required to be disclosed by the issuer.
Another advantage of the new market, according to Reilly, is that bonds may be denominated in any currency, including Australian dollars.
This, he said, gives an issuer the flexibility to structure an offering in line with its currency exposure, avoiding the need for hedging agreements.
“There may be quite an appetite to take Australian dollars even though traditionally they’ve only done it in yen,” Reilly said, adding that Australia’s relatively high interest rates, by developed country standards, was another potential draw card.
“Historically, the Japanese with zero per cent interest rates love to invest even in bank deposits here in Australia.”
While the target investor group of the Tokyo Pro-Bond Market is limited to “specified investors” and non-Japanese residents, the specified local investors predominantly include banks, insurance companies and other qualified institutional investors.
Additional specified investors comprise listed companies and joint-stock corporations with at least ¥500 million in capital.
Corporations and institutions with net financial assets of at least ¥300 million and at least one year of trading experience may also be approved as specified investors.
Of the target investor group, Reilly said it is institutional investors only and that is the critical difference.
“Think about it from a philosophical point of view,” he added. “Historically, going to the Samurai bond market they could also access retail investors and, hence, you need the greater protection.
“Now, what the Tokyo AIM is saying is ‘okay, we’ll create a special market just for professional and institutional investors only’ and, hence you don’t need protection against the ‘light-touch’ [regulation].”
Disclosure requirements
Reilly said the new market is attractive for Australian issuers who have accessed the Eurobond market or the Rule 144A market in America, as a comparable offer document in English can be used to list the bonds.
He explained, while an issuer must meet continuous disclosures requirements by releasing material information on its web site, exchange-listed issuers and those that are wholly owned subsidiaries of a foreign listed company are not required to make timely disclosures.
Under this regime, an Australian listed issuer can meet its continuous disclosure requirements for the new market by simply posting all its listing lodgings on its web site in a timely manner. An exception is annual reports, which must also be lodged with Tokyo AIM.
The market also provides flexibility in financial disclosure, with statements able to be presented in accordance with Japanese and American generally acceptable accounting principles or international financial reporting standards.
During the global financial crisis, the big four Australian banks accessed the Samurai bond market due to difficult conditions in the American and European debt markets, but experienced language and regulatory hurdles.
Eric Boone, who also works with Reilly in Baker & McKenzie’s American capital markets practice, said the savings in cost and time achieved by using the new market are substantial.
Boone added issuers are also able to use foreign attorneys rather than strictly relying on Japanese counsel to prepare the documents required for a retail offer.
Big Four interested
Australia’s big banks are certainly interested. A National Australia Bank spokesperson confirmed to AB+F that her treasury team was well aware of Tokyo’s move to attract high-quality issuers like Australia’s leading banks.
“English documentation would be a real benefit to an issuer like NAB,” she said. “Currently Samurai format requires Japanese Translations, which can be time consuming.”
The spokeswoman was, however, non-committal when asked if there were any moves afoot to take advantage of the lighter regulations.
“NAB looks at all alternative funding markets to determine where they fit in the context of NAB’s global funding activities,” she responded. “We would need to do more scoping to determine how this fits into our overall funding activities.”
Nonetheless, she added, the bank remained committed to the Samurai market, having accessed this market in July and would likely view the Tokyo Pro-Bond Market as “incremental” to the samurai “at this point”.
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- Asian Markets
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- Author:
- Michael Davis, mdavis@financialpublications.com.au
- Article Posted:
- August 15, 2011
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