The Murky World of Japanese Debt Underwriting Faces New Rules

Pedestrians wearing protective masks in the Shibuya district of Tokyo. Photographer: Kiyoshi Ota/Bloomberg
Pedestrians wearing protective masks in the Shibuya district of Tokyo. Photographer: Kiyoshi Ota/Bloomberg

(Bloomberg) -- New rules from a major Japanese financial industry group to encourage transparency in the corporate bond market took effect this year, with the first debt sales under the guidelines set for Friday.

Japan Securities Dealers Association--which comprises about 500 securities firms, banks, and other financial institutions--put the rules into force on Jan. 1. They require banks underwriting bond deals of over 10 billion yen ($97 million) to disclose to issuers the names and order sizes of major buyers and any investors who bought 1 billion yen or more.

Japan’s credit market has long been beset by an odd secret that’s been getting harder to keep: many debt sales that bankers said were successful actually weren’t. Arrangers sometimes would claim that all bonds were sold out, as they bought leftover notes and later sold them to investors at discounted prices. While it’s hardly a financial-system flaw for underwriters anywhere in the world to soak up part of a deal, not being transparent about that can create problems.

Read More: A Big Secret in Japan Debt Market Is Getting Harder to Keep (1)

The fudging has been either to cover up a lack of demand, salvaging business relationships with issuers, or to give underwriters room to make nice with favored clients by selling them the leftover securities at cheaper prices later, people familiar with the practice have said. That can be to the detriment of investors who paid more for the bond at the initial offering, and also if it further drives down the market price.

The new rules come after calls from the Financial Services Agency and some underwriters to bring more clarity to the process.

The first bonds set to price under the new guidelines are expected Friday from Development Bank of Japan and Japan Housing Finance Agency.

“Japan’s corporate bond market is smaller compared with overseas markets, but we hope the new rules will help energize our market and help it grow bigger,” said Takamune Miyawaki, a deputy general manager at JSDA.

If a member of JSDA breaches the rules, potential punishments could range from written warnings to fines or withdrawal of membership.

More Background: Murky World of Japan Bond Arranging Is Getting More Transparent