Takara Leben, a Japanese condominium sales company, is attempting to make history by executing the country’s first rights issue in a move that could have implications out of all proportion to the deal’s relatively modest size. The deal, due to close at the time of writing in late May, will be the first rights issue by a Japanese company under new regulations issued by the Tokyo Stock Exchange that aim to make rights issues easier for Japanese companies to undertake.
The timing of this test of the new model is significant given the looming Basle III regulations on bank capital. Japan’s banks have been among the world’s largest issuers of equity in the past two years, with the three biggest raising more than $20 billion between them. Under Basle III they are expected to be required to raise yet more capital. While most big banks worldwide have been doing so via shareholder-friendly right issues in the past couple of years, Japan’s banks have not been able to follow suit because the previous regulations were too rigid. As an investment banker in Tokyo points out to Euromoney, Japan and the US are the only major developed markets that have not seen large rights issues by financial institutions since the collapse of Lehman Brothers.
The main barrier to rights issues in Japan was a rule that new shares always had to be issued at the rate of one option for one existing share, effectively requiring any company that wanted to do a rights issues to double the number of shares outstanding. Now Takara Leben is piloting the stock exchange’s new rules, which make rights issues easier to pull off by allowing one option to represent a larger number of shares, reducing the dilutive effect of the rights issue and allowing more flexibility. A unique aspect of the deal, however, highlights a problem unique to the Japanese market that has not gone away with the regulatory reform.
Takara Leben, in a highly unusual move for a rights issue, is proceeding without an underwriter. Euromoney understands from sources in Tokyo that a prominent Japanese securities firm was close to being mandated on the deal, before withdrawing over concerns at the risk involved. The problem is that Japan’s Financial Services Authority requires that the issuer file its plans for a rights issue so far in advance of the issue date, with the timings further complicated by rules surrounding the issuance of prospectuses, that the period of underwriting risk is simply too long. A Tokyo-based investment banker who has been pitching rights issues to prospective clients for years says that the period of hard underwriting risk envisaged in such deals is generally two months, much too long for his firm’s internal risk controls.
So the market is watching Takara Leben’s deal, worth just a shade under ¥5 billion ($55 million), with great interest. It is good for Japan’s financial markets that the company is going ahead with the deal. Shareholders in the country’s big banks have been ill served in recent years by underperforming institutions that issue dilutive new equity too often. If this pilot deal is successful, it will pave the way for bigger institutions in Japan to raise capital in a way that global firms have shown recently to be a useful, shareholder-minded alternative to regular equity issuance.
It might also lead to some concerned discussion among Tokyo’s investment bankers. A successful rights issue for Takara Leben might suggest that the banks’ much-vaunted underwriting and deal-distributing services are less vital to an equity deal’s success than they tend to proclaim. If the deal fails, however, it will be a big setback for the development of the rights issue structure in Japan, with the lack of an underwriter adding a cruel twist. As one such investment banker in Tokyo points out, if a company collapses amid a deal with no underwriter, it would be hard for stakeholders to find anyone to sue.
For such a small deal, there is a lot riding on the success of Takara Leben’s rights issue.
