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Hybrid securities: Not many deals yet, but Japan still confident

Investment bankers in Japan are confident that a hybrid securities market will be established this year, despite fears that the lack of a sizeable standout deal thus far is contributing to investor and issuer caution about the structure. The sector was extremely active in the US as 2006 came to a close, with overwhelming levels of investor demand for deals from Axa and Washington Mutual, and bankers in Japan say that treasurers and CFOs there are looking closely at how their counterparts in the US use the instruments to fund acquisitions and improve capital structure.

So far there have been just two hybrid transactions in Japan: retailer Aeon’s ¥31 billion ($264.7 million) 50-year deal in September, and Nippon Steel’s ¥300 billion issue in November. Both closed successfully, but bankers not involved with the transactions say that neither looks like the kind of benchmark deal that could fully convince Japan’s cautious institutional and retail investors of the viability of the asset class.

“Nippon Steel’s hybrid issuance was a private placement to three Japanese banks,” says Nat Larson, director of new product development at Merrill Lynch, “and I think other issuers will see it as a one-off rather than a market transaction.

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