Japanese Deals of the Year 2002

Deal of the Year and Best IPO

Daido Life Insurance Company Y171 billion IPO

Nomura

The culmination of four years of hard work, the demutualization and IPO of Daido Life Insurance was a watershed deal for the Japanese markets and for the embattled life insurance sector. The deal stands as the first successful demutualization IPO in Japan and as such required creativity, innovation and perseverance in almost equal measure. The deal saw the sale of 633,215 new and existing shares for Y171 billion ($1.3 billion) during March 2002, a very weak time for the underlying Tokyo market.

The deal had to contend with the in-built instability that comes through a demutualization procedure, where many of the new shareholders seek to instantly sell their stock. To counter this, Nomura and Daido came up with a series of stabilization measures to reduce the high flow back risk. These included: the first ever greenshoe option for a global Japanese IPO; a directed sales programme to selected investors with a lock up agreement; and a share purchase programme. The book was finally closed 10 times oversubscribed, with the majority of demand coming from domestic and foreign institutions. However the final allocation saw domestic retail take 45%, international institutions take 28% and domestic institutions take 27%. The shares were priced at the top of the range at Y270,000.

The deal has set the benchmark for further demutualizations in Japan. Moreover, it creates another solution for Japan's troubled life insurance sector to turn to as it seeks to restructure and consolidate its way out of bankruptcy.

Best Secondary Offering

East Japan Railway Company Y266billion follow on offering

Goldman Sachs, Nomura

The largest equity deal of the year in Japan, the largest privatization of the year and one of the most successful deals, the secondary offering for East Japan railway (JR East), was a model for future government sales. The lead managers undertook to offload the government's remaining 12.5% stake in the company through an accelerated roadshow and bookbuild process. Investors clearly liked the equity story being marketed as the underlying shares actually rose during the premarketing of the deal and the sale was sold at a small 3.1% discount to the underlying stock.

Orders came in for seven times the amount of stock available, with Nomura's trusty sales force bringing in a host of orders from Japanese retail clients. In the end the deal was allocated 62% to domestic retail, with domestic and foreign institutions taking the remaining 38%.

This was a classic privatization where all the aims where achieved. The government raised as much money as the market would allow. The shares were mainly sold to the public. The underlying stock was not harmed. And with the deal the government has sold all its holdings in JR East, freeing the company's management from the shackles of state ownership. For the market, the lead mangers and investors, the success of the execution and post-sale performance in the market should bode very well for further government sales in 2003.

Best Equity Linked Deal

Mitsui Fudosan, Y80 billion international convertible bond

UBS Warburg

Execution is everything in the burgeoning CB market in Japan and this deal was easily the best executed deal of the year. At Y80 billion it is not the biggest deal of the year in what has been a very active market. But the way the deal was done is real testament to UBS Warburg's much vaunted execution and distribution capabilities.

The bank was mandated to do the deal at 3.30pm on July 10 after approval from the board of Mitsui Fudosan - a blue chip property company. It was launched at 4pm and books were closed just three hours later at 7pm Tokyo time. In the time between launch and close, the stock was not traded anywhere, so the share price could not suffer at the hands of shorters. In the days leading up to the deal, the bookrunner was not allowed to do any quiet pre-marketing due to concerns that hedge funds would short the stock. So UBS Warburg was to a certain extent flying into the deal blind. Yet the bankers' instincts were correct that Y80 billion could be raised at a high conversion premium of around 28%.

Being the first ever same-day pricing for a yen convertible is no small feat as it ensured that there was no adverse price movement in the underlying stock, something which has plagued many other yen CBs throughout the year. With Y800 billion of demand, UBS Warburg certainly got its expectations right and Mitsui Fudosan got an excellent deal with terms that allowed it to take advantage of an 11% rally in its share price in the weeks leading up to the deal. Since the deal was launched it has been one of the best performing convertibles in the market. Deals make franchises and this was certainly a coming of age moment for the ECM team at UBS Warburg.

Best International Bond Deal

Japan Finance Corporation for Municipal Enterprises (JFM) Y130 billion global issue due February 2012

Nikko Salomon Smith Barney, Nomura, UBS Warburg

This deal was a blockbuster in every sense of the word. It was the largest straight debt offering from a Japanese issuer and when it was re-opened in November with a further Y70 billion sold, it achieved super benchmark status in the international yen markets. Key to the deal's success is that it is rated higher than Japanese government paper, yet at the same time offers a higher yield. This means it is a true JGB substitute on which global investors can earn some return, a very attractive prospect.

It was launched at a spread of 7bp over the relevant 10 year JGB and quickly tightened to an average spread of 1bp-3bp over. It is the liquid benchmark off which all subsequent international yen deals have priced and has been the best performing international yen deal of 2002. International investors need more deals such as this if they are to match their yen holdings with the weighting demand by the global indices.

The success of this deal can partly be explained by the scarcity of comparable paper in the market that international investors can get their hands on. But the execution and attention to investor needs also played a huge part in this deal's success.

Best Samurai Bond Deal

GECC Y200 billion samurai

Morgan Stanley, Tokyo-Mitsubishi Securities

The market for foreign issued yen denominated bonds was crippled in 2002 due to the after-effects of Enron and the Argentina default and it took a brave issuer to attempt to do a deal in such a market. And that is exactly what General Electric did when it launched its huge Y200 billion four-tranche deal in June.

With maturities of 18 months, three years, five years and 10 years, the deal was structured to meet GE's need to term out its funding away from the short term commercial paper market. It also met with Japanese investors' desire to get good quality paper with a pick up over the negligible rates being offered by JGBs. The bonds offered spreads of between 10bp and 24.4bp over relevant JGBs for a triple-A rated global name.

The success of this deal was seen by the exceptionally large distribution to over 150 separate accounts, many of which had been hit by the turmoil in the samurai market after the global credit disasters in late 2001 and early 2002 and were clearly slightly credit nervous. Furthermore, the deal allowed GE to get funds at costs slightly below what they were paying in the US dollar market. This shows that with the right name, the right timing and the right approach, the yen market can be a liquid and cost effective way for international issuers to raise money.

Best Securitization Deal

CuBic One Y1.2 trillion synthetic CLO

Merrill Lynch, Mizuho International

Non-performing loans are perhaps the biggest problem facing the Japanese economy. So when a deal comes along suggesting that the biggest bank in Japan is taking steps to clean up its balance sheet, commentators take notice. And so when Mizuho sold its Y1.266 trillion ($10.17 billion) synthetic CLO deal in September, all other securitization deals paled into insignificance.

The deal is split into six tranches of declining credit quality rated Aaa to Ba2 by Moody's. It was structured as a Euroyen deal, but sold as a private placement into Japanese accounts. All the tranches have 2.5 year maturities and are backed by a Y1 trillion super senior credit default swap placed by Merrill Lynch. The deal offered the buyers of the notes - mainly insurance companies and regional banks - profitable exposure to the credit of 151 top tier Japanese credits with generous terms when it comes to credit-event definitions.

But the real beneficiary of the deal is Mizuho Corporate Bank, which now can improve its returns and its BIS ratios ahead of the planned rejuvenation of the Japanese banking system. The deal is the first out of Mizuho's Y10 trillion programme and its success shows how the tools of securitization are being put to work on one of Japan's most intractable problems. Moreover, observers attest that its success will encourage other Japanese banks to try similar deals and come to terms with their impaired loan books.

Best Domestic M&A Deal

$11.9 billion merger of Kawasaki Steel and NKK to form JFE Group

Goldman Sachs, Morgan Stanley

In September 2002, the shareholders of Kawasaki Steel and NKK exchanged their stock for shares in the newly merged company JFE Holdings, bringing to an end a period of consolidation in the Japanese steel industry that has seen the number of companies shrink from five to two. This tough time for the industry puts a premium on scale and the formation of JFE creates the fourth largest steel group in the world in terms of crude steel output. The deal comes at a time of depressed domestic demand in the steel industry and will allow Y80 billion of costs to be eliminated through annual synergy effects. The new company has combined assets of $40 billion, combined revenues of $26 billion and can produce 34.5 million tons of raw steel a year.

The deal was structured as a stock for stock exchange. Each share of Kawasaki Steel was exchanged for one share in JFE, while each share in NKK was exchanged for 0.75 shares in JFE. The shares of the old companies were delisted and the new shares were immediately listed in the Tokyo, Osaka and Nagoya exchanges. Morgan Stanley advised Kawasaki Steel while Goldman Sachs advised NKK. Consolidation is desperately needed in all sectors in Japan and deals such as this show that groundbreaking mergers can happen between trusting competitors with positive effects for all concerned.

Best Cross-Border M&A Deal

Roche's $4.7 billion acquisition of Chugai Pharmaceutical

Goldman Sachs, JPMorgan, UBS Warburg

The beauty of this transaction and what makes it stand out from so many other Japanese cross-border sales, is that the Chugai did not have to do the deal, but rather, it wanted to do it because it was the right thing to do for the shareholders. Doing an intelligent deal from a position of strength is infinitely more desirable than trying to cobble together a transaction when times are tough.

Nevertheless, this deal was structured to allay many of Chugai's concerns, showing as much willingness to compromise on Roche's part as on Chugai's willingness to do the deal in the first place. The acquisition process included the spinning of off Chugai's Gen-Probe subsidiary in the US to Chugai's shareholders - a deal demanded by anti-trust concerns. Then, Roche's Japanese subsidiary Nippon Roche was merged into Chugai, giving Roche 39% of Chugai. Roche then bought another 10% of Chugai from existing shareholders and acquired another 3% of new shares to bring its total up to 50.1%. In return it guaranteed Chugai's management independence while also giving them first access to Roche's global R&D capability. Roche in return gets to consolidate Chugai's accounts into its own. In other words, every side got what they needed in order to do the deal.

What was also crucial to the success of this deal was the intense investor relations work that was need to get it approved. Many of Chugai's biggest shareholders had been hoping for an acquisition and they needed to be fully convinced that this was the right deal. The complex structuring and rigorous attention to detail inherent in this transaction show that with a modicum of flexibility, great cross border deals can be closed in Japan.

Most Innovative Deal

Atami beach line Y12 billion toll road securitization

Nikko Salomon Smith Barney

This deal, while not innovative by global standards, has certainly set a precedent in Japan. It is the first ever toll road securitization in Japan and has set a precedent that many other deals will follow. The road was owned by Mitsui Kanko Development on the Izu Peninsula one hour south of Tokyo and is the oldest privately owned toll road in Japan. Structuring the deal took over 12 months of legal research as well as many hours of engagement with the rating agencies and regulators. At Y12 billion, it is not large by any means, but investors liked the diversification of assets that it brought to their portfolios.

Perhaps most importantly, many other toll road operators, including many cash poor municipalities, are in advanced stages of launching their own deals. Indeed NSSB estimates that for the government's Japan Highway Public Corporation, which owns many of Japan's toll roads, the new asset class is valued at between Y3 trillion and Y4 trillion. Innovations need to be useful and this deal will be seen as a path breaking transaction in the development of the securitization market in Japan.