[BreachExchange] Nomura loses underwriting deals as watchdog imposes penalty

[Destry Winant]

https://asia.nikkei.com/Business/Companies/Nomura-loses-underwriting-deals-as-watchdog-imposes-penalty

More companies looking to raise capital are excluding Nomura
Securities from underwriting operations, as the Japanese brokerage is
penalized by a financial watchdog for leaking confidential
information.

This puts pressure on parent Nomura Holdings as the third offering of
shares owned by the government is slated for this fall.

Honda Finance, the finance unit of Honda Motor, dropped Nomura on
Monday from its list of principal underwriters for 60 billion yen
($548.3 million) worth of corporate bonds scheduled for issue in June.
The underwriters will be SMBC Nikko Securities, Daiwa Securities Group
and Mizuho Securities.

"We dropped Nomura after considering various views, including the
impact on investors," said Takashi Sugiyama, a Honda Finance
executive.

The move comes amid revelations that a Nomura Securities employee
shared sensitive information regarding restructuring of the Tokyo
Stock Exchange with investors. Japan's Financial Services Agency
announced Tuesday that it has issued business improvement orders to
Nomura Securities and its parent.

The FSA criticized Nomura for lacking a commitment to legal compliance
and urged the brokerage to take corrective action to better manage
information and improve professional ethics among employees.

Many companies prohibit themselves from doing business with other
companies that are facing administrative sanctions. It is common for
under-the-gun brokerages like Nomura to be temporarily excluded from
being principal underwriters.

Last year, Mitsubishi UFJ Morgan Stanley Securities was prohibited
from bond underwriting and stock brokerage operations after an
employee was found to have manipulated prices in trading Japanese
government bond futures.

Nomura may also be shunned until it submits an improvement plan to the FSA.

Meanwhile, Fuji Oil Holdings, which plans to issue subordinated
corporate bonds worth about 35 billion yen, switched its principal
underwriter from Nomura to Daiwa on Monday. The issue is vital to the
company's effort to shore up finances following the purchase of
Blommer Chocolate, a U.S. chocolate maker.

"We changed our principal underwriter considering the effect of the
incident on our stakeholders, including investors in [our] stocks and
corporate bonds," said a Fuji Oil representative.

Construction machinery maker Komatsu also dropped Nomura, naming Daiwa
as sole principal underwriter for its 20 billion yen issue of
five-year bonds, the terms of which are scheduled to be determined on
Friday. Nomura had served as a principal underwriter of Komatsu's
corporate debt in recent years.

Subway operator Tokyo Metro will also drop Nomura from underwriting
corporate bonds scheduled to be floated in June.

Osaka Gas was among the first to drop Nomura immediately after Koji
Nagai, group CEO of Nomura Holdings, held a news conference on May 24
to explain the information leak.

According to market data provider I-N Information Systems, Nomura was
Japan's No. 2 underwriter in fiscal 2018 behind Mizuho Securities,
backing 2 trillion yen of corporate bonds -- about one-fifth the total
issued.

Still, Nomura is ranked second again this year, underwriting 495
billion yen of corporate bonds as of May 24.

Mizuho, Nomura and Mitsubishi UFJ Morgan Stanley have gone head to
head in the underwriting business over the past few years. But if
Nomura is excluded for long, the landscape of the corporate bond
market may change.

Some investors are holding off working with Nomura for the purchase of
outstanding and new debt. "We cannot place orders with Nomura until
the FSA receives the brokerage's corrective measures," said a manager
at a Japanese investment company.

An official with Nissay Asset Management said it is common to stop
working with a brokerage that is subject to disciplinary action.

Market watchers will look for any spillover effects from corporate
bonds to stocks, particularly with the float of Japan Post Holdings'
shares this fall.

The Finance Ministry insists that brokerages have sound internal
controls before being named principal underwriters for government
securities. Because Nomura is being punished for lax controls, the
ministry may deem it unfit for such a role.

If this happens, it remains to be seen whether the other underwriters
have the capacity to handle Japan Post's float, which is expected to
top 1.2 trillion yen. All will try to gain market share in the absence
of Nomura, but are uncertain whether they can handle the massive float
without Nomura's help.

Nomura handled about 500 billion yen worth of Japan Post Holdings
shares in the first- and second-round offerings.

Parent Nomura Holdings logged a net loss of 100.4 billion yen -- its
first loss in 10 years -- in the fiscal year ended March, based on
U.S. accounting standards. The company hopes to return to
profitability this fiscal year by restructuring overseas operations,
including reducing the number of sales offices.

The information leak was revealed just as the brokerage was trying to
turn earnings around. The key question now is whether Nomura can
regain trust, as failing to win big underwriting projects could
discourage its employees.