Japan’s three ‘mega-banks’ -- SMBC, MUFG and Mizuho – are benefiting from a scale-back in lending by European banks to entrench themselves in the South American market, according to an article by Latin Finance.
"We would mandate … [Japanese lenders] for future deals," Enrique Tarazona Soria, vice president of fleet and offshore services at port operator Tramarsa, was quoted as saying, clearly comfortable with the terms on a $280 million project financing for expansion in Peru. "In the future if all lenders are working on the same pricing terms [as Japan’s mega banks] then we will lean towards our relationships with Japanese lenders."
After reviewing proposals from 15 lenders, two Japanese lenders - SMBC and Mizuho - won the mandate on this deal along with Crédit Agricole, Citi and Natixis.
While the terms on the deal were considered aggressive, this is not unusual. Latin America’s most-frequent issuers command pricing that similarly-rated corporates in the United States don’t typically see, said Sara Pirzada, an executive director in Mizuho’s corporate and investment banking division.
The transaction – put together two years ago – encouraged Tramarsa to extend its banking relationship with two of the big three Japanese banks in advance of any future project financing deals.
Relationship-building is, of course, at the heart of Japanese business culture, and with many non-Japanese banks feeling the heat from aggressive pricing demands from borrowers, the path has opened for Japanese banks to cement longer-term relationships with borrowers in the region.
There are good reasons for Japanese banks to do this. Equipped with strong balance sheets and low funding costs, they have a competitive advantage in the lending market, as well as proven expertise in project financing. This competitive advance has increased as the capital impacts of Basel III on U.S. and European banks bite hard. As a result, pricing is a key factor that has been tough for many lenders to address.
Mizuho’s Pirzada says Latin America still faces "record low pricing," but notes that the mood is changing. "We are getting closer to an upward trend," she says. "But after pricing dropped so aggressively, and so consistently, it’s almost as if 'flat’ was the new increase." An uptick in pricing is approaching, she argues in the article, but maintains that it will be minimal for blue-chip borrowers. Unlike the bond market, Latin America’s loans space is less reactive to global economic shifts and pricing takes longer to change, Pirzada adds.
"It’s a matter of re-pricing risk, there have been downgrades in the region and banks still have capital to place," she says. "In the last few years we have seen benchmark liquidity, but it’s about quality now. As lenders, you take solace in companies with strong credit fundamentals," LatinFinance quotes her as saying.
Maria-Leticia Ossa Daza, a partner at law firm Willkie Farr & Gallagher says five years ago Japanese lenders wanted to create a footprint in Latin America’s lending space and capitalize on the region’s growing infrastructure pipeline, according to the article. "Historically, Japan and Latin America have had close trading ties and now European and US banks are undergoing a lot of change, so it’s an opportunity for Asian lenders to increase their share."
Constrained domestic growth and Japan’s dwindling population forced companies to export its investment abroad. Japanese banks’ balance sheets, therefore, are best used away from home.
The results are showing. In 2009, no Japanese banks appeared in Dealogic’s Latin American loan rankings. In 2013 MUFG sat in second place. Last year, all three finished inside the top ten bookrunners in Latin America’s loan rankings, according to the article. At the end of the first quarter of 2016, all three finished inside the top six bookrunners, leading seven out of thirteen transactions signed in the first quarter.
Even though Japan’s largest banks are looking to overseas markets for lending opportunities, there could be a slew of new business bubbling up closer to home. According to Bloomberg, by May-end 2016 there had already been more than $55 billion of mergers and acquisitions with Japanese firms as the target or asset seller. That’s more than any year in the past decade at this point of the year.
This slew of acquisitions could provide a windfall for Japanese banks, as companies look to handle a broad array of crisis-driven deal talks.
Simon Hylson-Smith is a former financial industry editor and currently CEO of Paragon.
Simon Hylson-Smith is a former financial industry Editor and currently CEO of Paragon.