Japan's Sumitomo Mitsui Financial Group Inc. successfully placed ¥140 billion of additional Tier 1 (AT1) bonds April 25, signaling that investor confidence in the instrument has returned after the unexpected write-down of similar bonds sold by Credit Suisse Group AG.
The Japanese megabank's AT1 sale was the first major issuance since the Credit Suisse rescue in March. "We had a good response from investors" and the issuance amount met the bank's expectations, a Sumitomo Mitsui Financial spokesperson told S&P Global Market Intelligence via phone.
Sumitomo Mitsui Financial sold the AT1 bonds in two tranches — ¥89 billion of bonds that can be called after five years and two months with a coupon of 1.879%, and ¥51 billion of 10-year and two-month bonds with a 2.182% coupon, the spokesperson said. The bonds carry a spread of 171 basis points over Japanese government bonds.
"I got a shock from Credit Suisse's AT1," Haruyasu Kato, a fund manager at Asset Management One, said of the decision by Swiss authorities to force the troubled bank to write down its AT1 bonds to zero as a condition of its sale to bigger rival UBS Group AG. "But AT1 issued in Japan is different from [AT1] sold overseas because Japanese banks are in a good shape," Kato told Market Intelligence in a phone interview.
While bondholders receive preferential treatment over shareholders in a restructuring, Credit Suisse's AT1 terms under Swiss law did not require the bank to follow the traditional capital structure, analysts said. As a result, holders of the AT1 bonds were wiped out in the rescue deal. AT1 bonds outside Switzerland are not subject to the same rules and are considered to be less risky than those issued by Credit Suisse, as bondholders will be paid out before shareholders.
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Attractive coupon
Kato, who added an undisclosed amount of the Sumitomo Mitsui Financial bonds to his portfolio, termed the coupon rate offered by the bank as "attractive." The asset manager is also considering investing in a planned AT1 bond sale by Mitsubishi UFJ Financial Group Inc. in May.
Mitsubishi UFJ Financial, Japan's largest bank by assets, reportedly delayed the sale of its AT1 bonds, which it had planned for late April, until at least mid-May to review investor demand after the Credit Suisse troubles and following the collapse of the US regional banks that shook investor confidence in capital markets.
Sumitomo Mitsui Financial's issuance is an indication that the "AT1 market is coming back," said Mana Nakazora, a credit analyst at BNP Paribas Japan.
Sumitomo Mitsui Financial has raised a total of ￥757 billion through the sale of AT1 bonds since 2015, while Mitsubishi UFJ Financial issued ￥1.368 trillion worth of such debt since 2015 and Mizuho Financial Group Inc. sold ￥1.455 trillion of such bonds since 2016, according to company statements. AT1 bonds, a type of subordinate debt, are issued by banks to beef up their capital without selling new shares that would dilute existing investors.
Mizuho Financial "will make a decision on an issuance of AT1 bonds by discussing the timing with Japanese institutional investors," said a company spokesperson, declining to elaborate further.
As of April 24, US$1 was equivalent to ¥134.40
