Mitsubishi Wins Chicago Credit War: Japanese Bank Undercuts Hometowners for City's Letter of Credit as It Moves into Municipal Finance with Its Foreign Bank Advantages
Morris, John, American Banker
CHICAGO--A Japanese bank has won a major battle in Chicago that will have profound repercussions for municipal finance officers across the country.
An extremely aggressive price cutting policy by Mitsubishi Bank Ltd. will set a new benchmark for municipal credits, banking sources said. The action has enhanced Mitsubishi's drive to become a leading municipal lender, and at a price so low that American banks wonder if they'll be able to compete.
The Japanese bank is reportedly charging only an average 0.31% of the principal amount -- or $1.5 million -- to issue a $259 million letter of credit to back a debt issue by the City of Chicago. Its nearest competitor, First National Bank of Chicago, pared its bid to an average 0.45% in a second round of bidding.
Until now, bank fees for municipal letters of credit had generally not fallen below the 0.5% plateau set by Mitsubishi in its landmark $500 million deal for Michigan some 18 months ago. As recently as last December, Chemical Bank charged 0.62% for backing a revenue bond to help finance expansion at Chicago's O'Hare airport.
Chicago banks are miffed not only that Mitsubishi could undercut them by such a substantial amount but that a foreign bank -- and a Japanese one at that--should come between them and their City Hall client. Pearl Harbor and Saving Money
Aldermen in the city's finance committee were not thrilled about Mitsubishi's low bid, either. Furious debate pitted reminiscences over Pearl Harbor and Alderman Roman Pucinski's role as a bombardier in the first air raid on the Mitsubishi Aircraft Works in 1944 against a saving to the city of tax dollars.
In the end, dollars won -- but not before First Chicago had also been stripped of its role as an underwriter of the debt issue as punishment for not outbidding Mitsubishi.
The action also brought back memories of aggressive price-cutting by Japanese banks just a few years ago as they strove to establish themselves in the United States.
For Mitsubishi, clinching such a visible deal is quite a coup that will help further its plan to become a major municipal lender. This is the first American city it has financed.
Banking sources said that its Michigan financing really set the ball rolling. Since then, Mitsubishi has aggressively solicited municipalities and investment bankers, letting it be known that it is "in this business in a big way," said one local banker.
"No one thought this letter of credit could be done below 37 basis points--but evidently Mitsubishi thought otherwise," he said.
And at First Chicago, chairman Barry F. Sullivan remarked: "This was an aggressive move by them to get inot a line of business under a profit margin that other financial institutions cannot profit from." He added: "Occasionally, we'll get outbid."
No one would actually call Mitsubishi's price a loss-leader, but they pointed out several rasons why the Japanese bank was able to outbid the Americans. …