First it was Deutsche Bank, then South Korea’s Woori Bank, Spain’s Banco Sabadell and now, Mizuho has become the first Japanese bank in recent years to decide not to repay a bond as expected.
Mizuho, Japan’s second-largest bank by revenue, declined to redeem $1.5bn of perpetual subordinated bonds in order to preserve capital eroded by losses on stock investments, Bloomberg reported on Monday. The 8.375 per cent bonds sold in 2004 become callable on April 27, according to Bloomberg data. The securities are held by retail investors in Asia, Mizuho said on its website, adding that such bonds aren’t typically redeemed at the first call date.
At the same time, Mizuho said it would fully redeem €750m ($990m) of euro-dated subordinated bonds sold to institutions outside Japan on the first call date in April.
Mizuho’s move follows similar decisions by Deutsche, which last December jolted investors when it became the first big bank to say it would not repay €1bn ($1.4bn) of a particular kind of bond as expected in January, and Woori Bank, which decided in February not to exercise an option to repay $400m of subordinated bonds.
While the decision to ignore a call date doesn’t immediately hit a bank’s credit ratings, some – including key credit-rating agencies – see non-redemption as a worrying trend that not only further erodes investor confidence in the banking sector but is also likely to raise costs of bond-issuance for the bank in question and ultimately undermine its credibility. When banks decide not to redeem the bonds at the earliest opportunity, the market value of the instruments falls, hurting the investors who are stuck with the bonds. Understandably, too many such occurrences could drive investors away from such deals in the future.
In some cases – such as for Deutsche, which had issued hybrid-capital bonds – nonredemption can require the issuer to pay a higher penalty coupon rate.
For Mizuho, there are no such direct penalties. Nor will its nonredemption affect the bank’s credit rating, just as it did not immediately affect Deutsche’s or Woori’s. But as Moody’s says in a Tuesday note:…under the terms and conditions of the perpetual subordinated bond, the non-redemption at the first call date does not constitute a default. The non-redemption risk represents pure market risk — which is not incorporated into the credit rating process.
Whilst Moody’s recognises that such subordinated capital instruments issued in the Asian retail market are in the majority of recent cases not redeemed on the first call date, Moody’s notes that Mizuho’s action with regard to this perpetual bonds is also a reflection of difficult primary market environment surrounding bank capital outside as well as inside Japan.
And the killer points: Mizuho banks’ ratings including BFSR have been on review for downgrade due to its declining capital flexibility since -December 2008. While there are reasonable economic benefits to its decision not to call under current global credit crisis and there are increasing cases of such non-redemption on a call date by international banks, the potential damage to Mizuho’s reputation could hinder its future access to bank capital markets. Moreover, at a broader level, Moody’s expects that the negative ramifications from this development will also extend to other Japanese banks.
As one Tokyo-based analyst commented to Bloomberg about Mizuho’s move: “This is about capital preservation; that is the underlying reason…It’s going to be a disappointment for investors as it kind of acknowledges their weakened capital position compared to other banks.”
Mizuho has indeed not had a good time lately, in January cutting its profit forecast for the fiscal year that ends Tuesday to Y100bn from Y250bn, citing investment losses and rising bad-loan costs. Goldman Sachs recently estimated the bank may lose Y136.6bn for the fiscal year to March 31. Just last month the bank, hurt by losses on its Y2,900bn ($30bn) in stock investments, agreed to pay 14.95 per cent interest on $850m of perpetual subordinated securities.
Coming after its ratings were placed on review for a possible downgrade by Moody’s in mid-December, and before its extension of the bond redemption, it is not the ideal time for Mizuho to provide further evidence of financial weakness. But as Moody’s and other analysts suggest, the avoidance of initial redemption dates for bonds might become more common among the growing ranks of battered banks in future.
Not only that. As Lex noted in February:The worry is tit-for-tat responses. When Japanese and Swedish banks failed to redeem as expected in the 1990s, they were locked out of markets for months, if not years. It also suggests that the issuer expects dysfunctional funding markets for the foreseeable future.
Related links:
Mizuho won’t redeem $1.5bn of bonds next month – Bloomberg
Mizuho slashes profit forecast - FT
Banks who might not call – FT Alphaville
Deutsche Bank takes penalty instead of bond call – FT
Deutsche Bank – Lex
Woori Bank shuns option to repay bond – FT
Why, Woori? – Lex