MUFG Group’s green light for Australia

Improved relative pricing and a desire to diversify a substantial total loss-absorbing capacity (TLAC) requirement led Mitsubishi UFJ Financial Group (MUFG Group) to print its debut Australian dollar benchmark deal in September. The issuer is putting its green-bond-qualifying assets behind its TLAC programme in a bid to maximise the participating investor base.

KangaNews spoke to Ryusuke Kobayashi and Junse Yamada, both vice presidents in MUFG Group’s office of the CFO in Tokyo, about the deal, the issuer’s TLAC programme, the role of the Australian dollar market, green bonds and a Japanese take on environmental, social and governance (ESG) factors – at bank and societal level.

Transaction details, stats and lead-manager insights

All the key information about Mitsubishi UFJ Financial Group (MUFG Group)’s debut benchmark in the Australian dollar markets including book data and perspectives on the development of a green-bond market for global bank issuers in Australian dollars.

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How did you reach the conclusion that the Australian dollar market would be suitable for MUFG TLAC issuance?

Kobayashi First, our total capital under Basel Ⅲ, in additional tier-one and tier-two format, has been funded in the Japanese domestic market. For our TLAC-eligible senior issuance, we have mainly used US dollars and the euro market – we have issued US dollar benchmarks since 2016, in euros since 2017 and some private placements in other currencies including Hong Kong and Australian dollars.

As a result, MUFG’s TLAC ratio is currently just more than 18 per cent against the minimum requirement of 16 per cent by the Japanese Financial Services Agency. But the requirement is going up to 18 per cent from the end of March 2022 and we want to have a 2 per cent buffer above this level.

Of course we are very conscious of the potential for market disruption and the unpredictability of various political situations, especially as US dollars is our main currency. To achieve our target, we have been seeking opportunities to diversify the currency mix and to enhance our investor base.

We took the view that Australian dollars would be a good diversification currency because we are aware that the investor base is very different to that for US dollars.

What were your pricing expectations going into the transaction and how did Australian dollar pricing stack up on an international basis?

Kobayashi Three or four months ago, Australian dollar issuance was indicated as more expensive than what we could do in US dollars for MUFG’s TLAC-eligible senior issuance. The big change was the Australian Prudential Regulation Authority announcement on Australian TLAC. This changed pricing, to the extent that we were ultimately able to issue roughly flat to our US dollar curve. It was good to get diversification that was also cost effective.

Yamada From what we have seen, TLAC deals from other large Japanese banks in Australian dollars have tended to print 7--11 basis points back of US dollars. We were very pleased to print flat to, or even slightly inside, our US dollar curve – though the tight spread environment might have affected demand to some extent. Even so, we printed A$500 million from a book that was close to A$1 billion and this gives us a good feeling about future deal outcomes.

“The Australian Prudential Regulation Authority announcement on Australian TLAC changed pricing, to the extent that we were ultimately able to issue roughly flat to our US dollar curve. It was good to get diversification that was also cost effective.”

RYUSUKE KOBAYASHI MITSUBISHI UFJ FINANCIAL GROUP

Speaking of demand, what sort of participation did you get from Australian domestic accounts?

Yamada We conducted a nondeal roadshow in Australia prior to bringing the deal, and the purpose of this was to introduce local investors to our business and in particular our capital-raising strategy and ESG approach. It is going to take time to build engagement, however, even though MUFG Bank’s local branch has issued Australian dollars previously. We found that many Australian investors did not have credit lines for MUFG at group level, for instance.

We believe we have completed our goal of making ourselves known and now we want to build demand. We received a positive demand from the investors we met and there were certainly no issues with MUFG as a credit.

Do you believe issuing Australian dollars off a Kangaroo programme rather than in EMTN format might help boost engagement from domestic investors?

Kobayashi We would consider this if we were convinced it would add investors to our deals, but at this stage we feel the demand we have seen is good. Since we recently updated our EMTN programme, our preference at the moment is to use this programme for Australian dollars as well as other currencies.

This was also a debut Australian dollar green bond for MUFG – and the first benchmark in the currency from any international financial institution. How active is MUFG as a green-bond issuer globally?

Kobayashi There is a big focus on ESG at MUFG – not just on the funding side but also in lending. As an issuer, we have previously placed three euro-denominated green bonds and two in US dollars. We believed adding another currency to the mix would help enhance and develop ESG appreciation.

Yamada We created a sustainable business team within MUFG Bank in August this year, and sustainability is also deeply embedded within many of the business divisions.

There is a perception that Japan is a long way behind on ESG but actually I think that is only true in one respect. It is slow coming through in markets and in corporate structure, but actually sustainability is quite deeply embedded in the Japanese mindset and in behaviour. This is a country that has a long history of confronting resources scarcity. We hope that our ESG engagement pushes Japan’s ESG movement to a higher level, like that in Europe and Australia.

What was your perception of Australian investors’ level of sophistication when it came to ESG and green bonds?

Yamada We have done ESG investor-relations work in the US and Europe, and we also visited investors in Hong Kong and Singapore before Australia ahead of our latest deal. Our perception is that Australia is way ahead of the US and Asia in ESG understanding.

“There is a perception that Japan is a long way behind on ESG but actually I think that is only true in one respect. It is slow coming through in markets and in corporate structure, but actually sustainability is quite deeply embedded in the Japanese mindset and in behaviour.”

JUNSE YAMADA MITSUBISHI UFJ FINANCIAL GROUP

We understand that some of the assets in the green-bond pool are Australian domiciled. Is this correct?

Kobayashi Yes. We have a lot of renewable-energy projects globally including in Europe, the US and Africa – and also Australia. We certainly wanted to allocatee Australian assets as much as possible for the local green bond issuance.

Most Australian green-bond issuances uses Climate Bonds Initiative (CBI) certification. This is not part of MUFG’s green-bond framework globally, but were you tempted to use it when addressing the Australian dollar market?

Kobayashi We are happy with our existing green-bond framework, which we believe is in line with global best practice at this stage. It meets the International Capital Market Association’s green-bond principles and we also have second-party opinion from Sustainalytics – which is well known and highly thought of globally. Reporting is also a very important factor for green-bond investors, and ours is acknowledged as best in class – though we aim to improve the sophistication of this framework continually.

Yamada We have issued three benchmark green bonds in the euro market using this framework. Our goal was to offer something that satisfied euro investors, who are about the most demanding in this space. We believe our success in the euro market shows that what we have is solid.

What about plans for future Australian dollar issuance by MUFG Group? Do you hope to bring transactions to market regularly?

Yamada We would like to issue every year to build engagement with local Australian investors but obviously this depends on market conditions. We do business in Australia and this means we can do regulatory funding through MUFG Group or pure funding through MUFG Bank Sydney Branch. We value diversity in our ESG and our regulatory funding, but we have to be careful not to cannibalise the Sydney branch’s investorsand of course we will always compare Australian dollar pricing with global markets. Our plan now is to spend some time analysing the impact of our debut transaction.

Kobayashi The other thing we have to consider is that our windows for issuance are relatively limited given Japanese and US GAAP [generally accepted accounting principles]. We have to arrange issuance strategy across currencies within this limitation.

Would MUFG consider issuing green bonds from its Sydney branch?

Yamada All our green bonds are issued by the parent. Partly this is about maintaining discipline in the framework – as I mentioned, reporting is critically important in this sector and we want to keep our framework as solid as possible. This means we prefer to keep a single issuing entity.

However, provided we maintain discipline in our framework this isn’t technically necessary. A bigger question for us is what is the best use of our green assets. We have a big TLAC requirement at the moment and we think being able to offer green TLAC product is valuable for the purposes of building our regulatory capital position.