Mitsubishi Brings a Japanese Touch to Municipal Letters of Credit
Mitsubishi Bank Ltd. had the distinction of being the first international bank to write a letter of credit on a major American municipal bond offering. It happened in October 1982, for a $500 million sale of Michigan tax and revenue anticipation notes.
Since then, other major Japanese, European, and Australian banks have eagerly entered the business of writing letters of credit for U.S. municipal bonds. International banks are loath to reveal how many municipal securities they have guaranteed, but Securities Data Co. puts the figure for 1984 at $7.66 billion -- up from $847 million in 1982.
Mitsubishi is the seventh largest bank in the world, with assets of $98.17 billion. Its letters of credit carry the coveted Aaa rating from Moody's investors Service. They are unrated by Standard & Poor's Corp., but observers say that may change soon.
Last week, Takehiro Naruse, manager of Mitsubishi's New York branch, and Hiroshi Ohnishi, deputy general manager, talked with Credit Markets' Mary G. Gotschall about the bank's future forays into the municipal market.
Q. Japanese banks have been aggressively outbidding American banks on letters of credit. For example, if an American bank charges 0.75% of the principal for the deal, you might charge 0.25%. Do you have a policy as to how much you charge?
Naruse: When we consider the letter of credit, the pricing has to compensate us for the risk we take. Sometimes we charge 0.25%, other times we charge over 1%. It depends on the risk, the length of the terms, and the credit of the issuer.
Q. Does Mitsubishi like short maturities on its LOCs?
Naruse: Yes. Usually our maximum credit period is seven years. The reason we limit out exposure is that it is very difficult for us to see what will happen in the future. Since we are a foreign bank, we don't know the culture or politics of the United States, so we prefer the shorter maturities.
Q. Because you are foreign, does it make it difficult for you to assess the quality of management in a municiapl issuer?
Naruse: First of all, we look at the track record. If they have a very good track record and they have been improving over the last five years, then we can make an arrangement with them.
When we negotiate with the issuer, the question of maturities for the LOC comes up, too. We start with three to five years. Usually, they want 10 years. We compromise for five to seven years.
Ohnishi: We sometimes syndicate among Japanese regional banks. There are getting to be many of these with offices in New York -- about 60.
Q. When you wrote an LOC on a $259.2 million issue for Chicago in 1984, some members of the city council protested having a Japanese bank hired for the deal. Have you have much difficulty with local politicians who argue that their municipality should "buy American"?
Ohnishi: That was an exceptional case. The local politician's first priority is responding to market conditions. Usually, we don't encounter that political reaction. It was recorded in a very exaggerated manner by journalists.
Naruse: You should look at this year's case. The first year we had that problem with the Chicago City Council, but the second year there was no objection.
Ohnishi: The first was so smoothly made that they decided to use us again this year.
Q. Are the other large Japanese banks trying to aggressively underbid you in letters of credit?"
Naruse: Yes, but I want to emphasize that it is a friendly competition. We entered this market in 1982. We did a few transactions after the state of Michigan. The largest deal was $450 million for Puerto Rico. Starting from 1984, almost all of the other Japanese banks started to get into this business.
Q. Whaths the lowest bid that they have made to undercut you?
Naruse: We lost many bids in 1984 and 1985.
Ohnishi: On occasion, we withdrew from the bidding in order to maintain our dignity. …