10/87 COMMERCIAL PAPER
The Eurocommercial paper market "is headed for a severe fallout of dealers...From 68 firms which claim they're involved today, the market will compress to five global leaders within the coming two years. Some Western bankers fear the Japanese may dominate that small heap. They expect the Eurocommercial paper market to move in the same direction as the larger Eurobond market, where aggressive Japanese securities houses now hold sway after pushing aside long pre-eminent Western rivals earlier this year. ASIAN WALL STREET JOURNAL, 10/15/87, p.9.
The recent decision by the Japanese government to permit the issuance of Euroyen commercial paper in the Euromarkets and commercial paper in Japanese domestic markets has sparked sudden interest by Japan's muscular financial institutions in a field they have previously shown little interest. As has been the case in most financial sectors in recent years, after the dust clears from the charge into the field, the odds are that there will be another financial sector where the Japanese are king of the hill. Recent capital losses by America's giant investment banks make it less than likely that they will be able to put up much of a fight. Japanese securities firms and banks in London have already staged raids on the staff of the competitors. They have been offering salaries of about 50,000 pounds per year for London commercial paper specialists, compared to about 30,000 pounds that they have been getting elsewhere. What with the almighty yen going through the roof, almost all non-Japanese talent looks like small change to Japanese firms today. Moreover, as the Japanese have shown in almost all business sectors, they are willing to take razor thin margins or even losses to secure market share. Their Western rivals, already grievously weakened by October 1987's market fiascoes are in no position to resist this. The volume of the Eurocommercial paper market is expected to reach about $50 billion this year, doubling the $25 billion of the previous year. The Japanese estimate that outstanding Euroyen commercial paper should reach $15 billion by 1990. Initially, the Japanese government will limit issues of Euroyen commercial paper to foreign companies and the overseas subsidiaries of Japanese companies with credit ratings of single-A or better. Euroyen commercial paper issues will not be permitted to be brought into Japan for 90 days after issue. Japanese firms issuing Euroyen commercial paper will not be able to bring the funds raised from the issues into Japan.
Japanese corporations are expected to begin issuing commercial paper domestically in Japan for the first time from November, 1987. The maturity period of the domestic commercial paper will be from one month to six months. The minimum issue unit will be 100 million yen. Both banks and securities firms will be permitted to underwrite the commercial paper issues. Dealers commissions, issue commissions and payment agent commissions will each be limited to 0.125%. Only firms which are permitted to issue unsecured straight bonds in Japan will be permitted to issue commercial paper domestically. This limits the issuers to about 180 Japanese companies. Companies with AAA ratings (about 30 companies) will not be required to have credit back-up lines. Companies with AA ratings and with net assets of 300 billion yen or more will likewise not be required to have credit back-up lines from banks. The same will also apply to firms with net assets of 200 billion yen and meeting certain current asset ratios. Foreign firms appear to be closed out from the domestic market, but still have access to the Euroyen commercial paper market. As graduated stamp duties will be applied to the commercial paper issues in Japan many are concerned it may damage the market. Such stamp duties have almost killed the yen bankers acceptance market in Japan. Securities firms have promised to slash their fees in order to ease the burden of the high stamp duties on issuers. The Ministry of Finance has noted that if there is strong opposition to the stamp duties changes may be made via tax legislation next year.
Commercial Paper Stamp Duties
Issue Amount ---------------------------Stamp Duty
50 million to 100 million yen ---20,000 yen
Up to 200 million yen ---40,000 yen
Up to 300 million yen ---60,000 yen
Up to 500 million yen ---100,000 yen
Up to one billion yen ---150,000 yen
Up to five billion yen ---200,000 yen
Concerned that they may be closed out of the new commercial paper market in Japan, the Institute of Foreign Bankers in Japan has issued the following report on the matter:
The Institute of Foreign Bankers, in anticipation of the creation of Commercial Paper (CP) Market in Japan expresses the desire that the market be structured in a way to:
(A) Allow equal business opportunities to foreign banks operating in Japan compared to Japanese banks and Japanese securities houses.
(B) Allow free access to the market by both foreign investors and borrowers.
(C) Allow banks to raise funds themselves through the commercial paper market on competitive terms with corporate borrowers and other available money market instruments.
(D) Be competitive with similar markets in the US and Europe.
(E) Provide the highest possible level of protection to the investor in terms of his capability to assess the risk-factor of his investments.
1. The market should be firmly established in an open market context: interest rates and yields should be determined on an open market basis which necessitates true primary and secondary markets.
2. Banks should be able to act freely as underwriters and dealers within the context of a, above.
3. Banks should be allowed to issue their own commercial paper and-or negotiable bank CDs on equivalent terms.
4. An independent and objective risk rating system needs to be established. In the absence of such a system, the issuance of corporate CP should be 100% supported by the CP back-up lines in the form of committed bank credit facilities.
5. Banks should be given free opportunities for credit enhancement, i.e. the issuance of bank guaranteed CP should be allowed. A comprehensive legal framework allowing this type of issuance should be established.
6. Eligibility for the issuance of CP should be purely based on risk considerations as determined by a rating system mentioned under 4 above (including bank guaranteed CP).
7. In order to allow foreign investors equal access to the market and for the sake of competitiveness with other international markets, both withholding taxes on interest (or yield) and stamp duties should be waived.
8. As far as issuance of bank guaranteed paper is concerned, equity requirements or capital adequacy ratios on such bank guarantees should be imposed on Japanese banks at levels comparable to those applied in other countries.
9. In order to assure competitive terms of the inter bank market with the CP market, the "collateral requirements" in the call money market and bill discount market should be abolished. The abolishment of collateral requirements is a general strong desire of the Institute of Foreign Bankers--independent from the creation of a CP market--since it is considered to be one of the main obstacles preventing foreign banks from a highly desirable further expansion of their money market activities in Japan.
The IFB would welcome the opportunity to discuss these issues with the appropriate Japanese authorities and expresses the hope that the requests of the foreign banking community will be given due consideration.
---Following a decision by the Ministry of Finance to permit the overseas branches of Japanese banks to handle commercial paper overseas, the US branch of Sumitomo Bank became the first Japanese bank to underwrite the sale of commercial paper in the US, with paper issued by the US subsidiary of Sumitomo Lease, an affiliate of the bank.
THE JAPAN LAWLETTER. October, 1987. By Roderick Seeman