There could be few clearer indications that foreign banks are smoking out the locals in the Japanese capital markets than Citibank's success in syndicating a $5 billion loan for Japan Tobacco.
The money was raised to finance the Japanese company's $8 billion acquisition of RJR Nabisco's non-US tobacco business. At $5 billion, the loan is a large by any standards, and in terms of Asia far surpasses QAF of Singapore's $1.7 billion deal in 1997.
Citi sent out 21 invitations for senior positions in the syndication and received 20 acceptances. The deal, from one of the few triple-A names left in Japan, offered institutions a chance to rebalance their portfolios and at the same time build links with one of Japan's oldest and most powerful companies.
The only bank thought to have refused the invitation was Chase, which was hoping to lead the deal in its own right.
Apart from the rivalry between Chase and Citi in Tokyo, the deal is a reflection of the changes going on in Japan at a broader level.
Even a couple of years ago it would have been unthinkable for an American bank to lead a deal of this scale. Today, with Japanese banks hamstrung and finding it tough to raise dollars, the gaijin are suddenly finding that a wide range of Japanese companies are interested in talking to them. JT is 66% owned by the ministry of finance - a fact which sends out an even more powerful signal that the foreign banks are welcome.
What is particularly stunning about this deal is that the Japanese relationship banks - Fuji foremost, DKB second - did not find out about the forthcoming deal until it hit the newspapers.
Since JT, advised by Salomon Smith Barney, was approaching Nabisco for price sensitive discussions, everything had to be kept under wraps. The deal suggests that the new Citigroup working as a team. Salomon put JT in touch with Citi about underwriting the $5 billion 364 day bridge loan.
The decision went to Bill Rhodes and Onno Ruding, respectively vice-chairmen of Citigroup and Citibank. From pitch to completion the process took four days and allowed JT to approach the acquisition with confidence.
In spite of its size, it wasn't a tough call. JT is distinguished by its strong balance sheet - almost unrivalled in Japan. It has 75% of the Japanese cigarette market and went into this deal with total debt of only ¥36 billion, and $5 billion of cash.
"This is a breakthrough," says Citi's Tokyo syndicate head Richard Magrann-Wells, "in terms of the type of customer we are now able to deal with."
The loan was structured 60% in dollars and 40% in yen, although Japanese institutions favoured a 40/60 split in favour of a bigger portion of yen. Fuji and DKB were negotiating to split the deal in three with Citi, but were intractable on the 40/60 split, and advised Citi that if it led the deal alone - without a Japanese player - it would have trouble with the deal.
This was not the case. And Japanese participation turned out to be relatively small by historical standards. About 35% of the deal went to six Japanese banks including Fuji and DKB.
For the gaijin firms it is the most recent of many deals won. Chase won the $750 million Fuji-Xerox deal last year, while Citi also led the groundbreaking deal for NEC last March. The NEC deal was groundbreaking as it took on Japan's hopelessly outdated usury law on the subject of commitment fees.
Japanese law had stated that no interest rate could be higher than 15%. However, a commitment fee - should the money not be drawn down - can be viewed as an infinite interest rate. Commitment fees were therefore out of the question.
A large Japanese bank had tried to sort out the issue of commitment fees with senior officials from the ministry of finance by taking them to a No pan shabu shabu restaurant. This restaurant was later closed down as unhygienic on the grounds that naked girls were climbing up and down ladders to fetch food and put it into men's mouths. It was not the ideal forum for discussing such a key issue. It also caused a scandal.
Citi's approach was to get several legal opinions and then go ahead with its NEC deal. The law was changed last month. For listed companies of a certain size, commitment fees are now deemed to be OK.
JT certainly fits into that bracket. This deal paid a commitment fee of 22.5 basis points for a commitment of $500 million and was priced at 60bp over Libor.
"We are delighted with the result of the transaction," says Avi Bindre, Citibank's managing director of loan products in Asia. "From Citigroup's point of view this is a perfect example of what major corporates such as JT should expect."