Banking on a merger for a competitive edge

Despite 2004 being a good year for UFJ’s trade-finance team, its ambition to raise its market profile to that of a major player remains. Yohihiro Kubo speaks to Kathleen Williams about the bank’s pending merger with Mitsubishi Tokyo, which would not only create the world’s largest bank, but might also allow UFJ to realise its goal by finally gaining a competitive edge on its European counterparts.

T he product of a merger between three Japanese banks in 2002, UFJ has persistently been plagued by excessive bad loans in its brief history. Despite turning in hefty losses for three years running, the bank managed to maintain its position as fourth largest in Japan due to an 82 trillion yen asset base. This was complimented by a $6.6bn capital injection from the Mitsubishi Tokyo Finance Group (MTFG) in 2004 to fend off a Sumitomo Mitsui Financial group takeover. Having been courted by the Japanese banking giants for the better part of 2004, UFJ is now on track to become a part of the world’s largest bank once the $38bn merger with MTFG is concluded this October.

This is good news for UFJ’s trade-finance team which has, against a backdrop of bidding wars, legal wrangles and reprimands from the Financial Services Agency for missed earnings targets and misrepresentation regarding the extent of its bad loan situation, steadily built up its portfolio and raised its profile in the market through a number of key deals in the past year.

Trade finance was highlighted as a core growth area at the bank’s inception in January 2002, and from the outset UFJ has invested heavily in this domain. Headquartered in Tokyo, where Tatsuhiko Yasukochi, general manager of the structured-finance department and global head of energy, commodities, export and project finance is based, the company’s trade-finance activities are operated from: Singapore, which covers South-East Asia; Hong Kong, which covers mainland China and Korea; New York, which covers Latin America; and London, which covers Europe, Middle East and Africa as well as Turkey, Russia and the CIS.

In the past year, UFJ’s London team has doubled in size (again) to almost 30 staff, bringing its global trade-finance team toll to somewhere between 60 and 70 professionals. “We are expanding our team to service LC-related business, structured trade finance (STF), commodity finance and forfaiting,” says Yohihiro Kubo, deputy global head of energy, commodities, export and project finance in London.

“At UFJ we see good potential for market growth and we are therefore putting our resources into these areas.”

Up until last year, UFJ was primarily involved in LC-related business and STF, but Kubo explains the focus has now shifted to growing its commodity finance and forfaiting businesses. While the latter form of financing is not the most popular instrument of choice at the moment, from UFJ’s perspective, it’s one that can compliment its offering. “By introducing forfaiting to our organisation, we are now ready to provide a full range of services for our export customers, which can be developed a lot further by originating the deals from the exporters,” he says. It has certainly enabled the bank to underwrite larger amounts and longer tenor transactions, which has helped raise its profile in the market in terms of the types of deals that is now able to arrange. “In many banks, the commodity finance team or STF team is completely independent from the team that is responsible for the bank’s transactions. However, at UFJ, both fall under a single umbrella and that is where we see a potential competitive advantage,” says Kubo.

By offering hybrid products across its business lines and utilising ‘new’ tools to improve its financing techniques, UFJ has already succeeded in gaining recognition for its role in such high profile transactions as the Duferco La Louvière €80m ($104.3m) commodity finance facility, which won a TFR 2004 Deal of the Year (see TFR, Feburary 2005, page 44).

Together with Deutsche Bank, UFJ closed syndication as mandated lead arranger on a tolling facility to finance up to 80% of the borrower’s inventory held at the production sites of Duferco La Louvière in Belgium, the trading arm of Belgium’s largest steel producer, in a revolving 364-day facility.

The Duferco deal was the first mandated transaction in commodity finance for UFJ, and it was unusual in that it applied a structure normally reserved for pre-export finance facilities in emerging markets. The combination of a syndicated structured commodity-finance facility with an asset-backed securitisation programme was a ‘first’. “Although factoring is a not a new product in itself, by bringing it in to the structure of the Duferco facility, we could enhance the credit profile of the facility, which was appreciated by the market participants,” Kubo adds.

The $330m pre-export financing for Sonangol, syndicated in the first quarter of 2004, is yet another example of a successful deal for UFJ. It was also the first time UFJ came to the market as a general syndication with the Japanese off-taker, with whom it has traditionally been involved in a number of club deals involving export receivables.

Aside from the large mandated deals making headlines in the trade press, UFJ has been active on several other new fronts during the past year, arranging closing on a dozen club deals mainly in the Brazilian softs market, for example. “We knew there were a number of markets in Latin America with great potential, especially in terms of the softs,” says Kubo, but it was only when Ian Henderson joined UFJ in early 2004 from WestLB (along with Joep Kockmann, now global head of commodity and structured trade finance at UFJ), that the bank was able to develop this business, concentrating primarily on soy beans and sugar in Brazil.

Looking at UFJ’s traditional trade-finance lines, the most important markets on the LC side of the business remain Turkey, Kazakhstan, Iran and Brazil. In terms of STF opportunities, Russia has proved particularly disappointing for UFJ, which was mandated lead arranger on the Yukos deal. Kubo attributes this to improvements in Russia’s credit profile and those of companies based in Russia (despite the negative impact of the Yukos affair), and to the fact that borrowers are increasingly moving to unsecured straight corporate facilities. “It is still seen as a good credit-risk market and the financing sources are therefore shifting from STF to pure corporate lending or bond issues for the major Russian corporates. So, we see fewer opportunities for the trade-finance players,” he says.

With Russia likely to remain quiet on the STF front for the time being, UFJ is keeping its eye on Brazil, Iran and the Ukraine, where it hopes to increase its activities based on rising fuel STF opportunities and forward bank transactions. “Iran is particularly interesting for us at the moment in terms of STF transactions, not only on the petrochemical side of things but also on the metals side,” says Kubo. This is not surprising given the $520m pre-export finance which UFJ arranged alongside BNP Paribas for the IPCC petrochemical facility in Iran last year. Usually mandated by BNP Paribas and Calyon, the IPCC facility was also an important transaction for UFJ in terms of being the first deal that it could originate from the off-taker, Glencore.

More recently, UFJ participated as arranger alongside a dozen international financial institutions in a $327.6m term loan, which forms part of the $910m financing facility for Petrobas’s PDET project, which is expected to further promote Japanese investment in Brazil. PDET envisages the construction and installation of offshore oil transportation infrastructure to gather crude oil from five Campos Basin platforms for transportation by tanker to Petrobras’s coastal terminals, or for direct export to other countries.

Looking ahead, for as long as commodity prices remain high, Kubo expects to see less opportunities arising from the exporter’s side, and therefore less STF activity from the emerging-market areas. “We may find more business from the import side,” he says “but sourcing new transactions from new sources is challenging for us in this environment”. This is where the pending merger starts to look more interesting for UFJ’s trade-finance team.

If the merger goes ahead as planned, UFJ’s trade-finance department can look forward to the prospect of expanding its portfolio by leveraging off a larger capital base and an even wider network as part of the Bank of Tokyo-Mitsubishi UFJ, as the banking giant will be known. “This [merger] will provide us with more flexibility in expanding our portfolio, and we also see the potential to further expand our business globally by using the wider MTFG overseas network,” says Kubo. It would also prove useful for UFJ’s plans to expand into China. “We have been thinking of expanding our business in China, and this has now become a top priority for UFJ on a global basis. We see a lot of potential there, with China importing just about every commodity you can think of,” says Kubo.

In the meantime, UFJ will continue to concentrate on expanding its commodity finance and forfaiting businesses, and on its strategy of offering hybrid products across its business lines to build on its profile and track record of mandated deals that it worked so hard to achieve in 2004.