Salomon Smith Barney’s alliance with Nikko in Japan has been a key to its success over the last two years in the Euro medium term note market. Japanese investors have become large and eager buyers of credit in recent months and they have been takers of large numbers and absolute volumes of EMTN trades, mainly in yen. The EMTN market has changed from one based largely on structure risk – with popular trades ranging from simple interest rate plays such as capped floaters to more esoteric currency and cross-market bets – into a credit market. Japanese buyers, facing new mark to market rules, have lost much of their appetite for exotic structures which at any time might produce violent losses or gains if properly valued.
Japanese buyers account for over one third of the entire privately placed EMTN market, with a liking for European corporate and bank names. And SSB has something of a hammer lock on that distribution. Many dealers can tap the five or so huge Tokyo-based investment trusts that have provided large volumes of shorter-dated funding to EMTN borrowers, like BT, KPN and Vodafone, this year. But borrowers want more longer-term funding. With 125 offices across Japan, Nikko allows SSB to cover medium size insurance companies and investment trusts across the country. While the large Tokyo trusts might buy $50-$100 million slugs of one year MTNs, the smaller buyers typically subscribe for $15 million average-size trades.
But they are key providers of longer-term debt for opportunistic issuers seeking chances to improve on their public bond funding costs.
SSB has a 25% share of the private placement yen EMTN market.
The MTN market is a hard one to quantify and measure. Most agree that it’s misleading to measure market position through numbers of MTN dealerships – acquiring these is an easy way to gain position for dealers who will set them up for free – more relevant is volume of debt placed. This is now becoming more visible, though still disagreements rage.
So many capital markets transactions are now conducted off medium term note documentation that most large widely syndicated public bond deals could strictly be classed as MTNs, as could self-led deals and securitizations. Most dealers agree it makes sense to exclude self-led deals and issues from special purpose vehicles to gauge which firms are really raising capital for borrowers, rather than repackaging their own secondary trading inventory.
So much for broad agreement. Dealers then fall broadly into two camps on how to further distinguish the true MTN market. There are many who argue that syndicated MTNs should be treated separately from true private placement MTNs. Some then go on to argue that there should be a further distinction between larger deals, where a single bank might sole-lead an issue of fairly plain vanilla bonds without the help of a syndicate. These might still fall more naturally into the realm of public bonds, rather than private placement MTNs, especially if they are short-dated.
But others take a contrary view. They claim that the MTN market is inevitably becoming more open and transparent and that this will only increase with the spread of internet distribution and eventually trading. They conclude that the distinction between syndicated deals and private placements is questionable as is any distinction based on size. The champions of this camp argue that the MTN market will inevitable become a more volume-driven and hopefully more liquid market where trading becomes more important, as it is in the US, especially as MTNs become more of a play on underlying credits of the borrowers, rather than on complex structures. “The non-syndicated private placement MTN market?”
Queries one dealer, “I’m not sure it exists.
Ultimately we work for the syndicate desk and we will bid for and execute non-syndicated deals. And we do $1 billion trades like that.
Who would have thought $1 billion placements would become common. The old distinctions are no longer helpful. Its all a question of how can you achieve the borrower’s funding needs in the most efficient way.” He adds: “This market will become more volume-driven and commoditized. Liquidity will become more important. It can’t go on as a private market.”
