Saturday, 19 January 2019

Nippon Life set to shine abroad

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Japan’s life insurers have been forced to seek out alternative markets for returns in the face of an ultra-loose monetary policy that has collapsed yields in the yen bond market. Nippon Life has led this new dynamic by seeking investments in project finance markets at home and abroad. By Jonathan Rogers.

The administration of Japan’s Prime Minister Shinzo Abe has engaged over the past four years in a radical economic experiment – dubbed “Abenomics” – in an attempt to drag the country back from years of deflation.

Abenomics involves a three-fold approach to defeating deflation: a massive fiscal stimulus via government spending; a supercharged monetary stimulus; and structural reform of the Japanese economy. The policy has also been designed to weaken the yen, in an attempt to import inflation through the pressure of more expensive imports.

The consequence of the ultra-loose monetary policy, which has involved a programme of government bond buying by the Bank of Japan, has been a collapse in yen bond yields and the drying up of liquidity in the Japanese government bond market.

It is estimated that as a result of this policy, the central bank owns more than 40% of outstanding Japanese government bonds (JGBs); the offshoot is that government bond yields have traded in negative territory, most recently in September, and in order to book a positive yield on JGB investment, a move up the yield curve to 20 or 30 years has been necessitated, where a handle of around 1% was available as this report went to press.

For Japan’s institutional investors, the parsimonious yields available in the yen bond market have forced a rethink of investment strategy.

Life insurers such as Osaka-based Nippon Life – Japan’s largest private sector life insurer by revenue – which have traditionally held the bulk of their investments in JGBs, have been forced to move to alternative investments in order to match the liabilities in their portfolios.

“In the context of low yields in the yen bond market, where even now Japanese government bond still yield less than 1% at 20 to 30-year durations, it has made sense for us to seek higher yields in growing fields,” said Kazuo Asai, head of international projects in the structured finance department at Nippon Life’s headquarters in Tokyo.

In the case of Nippon Life, which has total assets of US$555bn-equivalent, this has involved venturing into the project finance market. The initial foray involved investing in domestic PF – the company has booked exposure to 40 different projects in Japan over the past four years totalling ¥300bn in vehicles ranging from traditional PF to leveraged buyouts and hybrid financings – while this year, Nippon Life has broadened the scope of this new approach to include overseas project finance.

“We made our entry into the project finance market around four years ago in Japan, and have closed around forty deals since then, in a variety of sectors in the infrastructure space, including solar, wind, and biomass renewable energy, thermal power, and airport concessions. We have arranged or participated in syndicated loans for tenors as long as 20 years and the need to match long-term liabilities with assets suits the project finance arena.”

The company’s exposure to domestic PF extended from arranging syndicated loans at the top and participating in syndicated loans at the lower level, as well as buying secondary loan paper.

The move to seek out overseas investment opportunities was laid out starkly by the company’s president, Yoshinobu Tsutsui, in January when he outlined the company’s newly minted policy of shifting to alternative investments. A team devoted to PF has been put together over the past few years, through in-house hiring, and the company aims to invest ¥1.5trn (US$13.77bn) in onshore and offshore PF over the next four years.

“Our basic goal is to establish a well balanced portfolio of assets, with a primary focus on the developed nations, in the early stage of our portfolio construction. We now have a team of 12 professionals in Japan dedicated to the project finance business and the headcount is likely to grow,” said Asai.

“Entrusted by our 11.8m retail customers and 21 thousand corporate clients with a mission to invest in long-dated assets, and in order to achieve a premium over benchmark rates in Japan, we have looked outside the domestic markets for suitable exposure.”

A full-scale move by the Japanese life insurance industry would mimic the trend in recent years for global pension funds to seek returns in the infrastructure sector, either via equity or debt investing, and the vast liquidity available for investment in Japan’s life insurance industry is certainly a rather beguiling prospect.

The commencement of Nippon Life’s overseas adventure was relatively modest, involving the purchase last May of a US$100m project finance loan made by MUFG to finance an LNG project in the United States. With a tenor of about 10 years, the loan yields the insurer around 1.5% when hedging costs are taken into account; a reasonable return versus booking the ultra-long tenors required in the JGB market to reach a 1% handle, and certainly a level that allows the insurer to meet obligations to its policy holders.

“Besides Japanese yen, we can provide loans in foreign currencies from US, Canadian and Australian dollars, the euro and the British pound, from both primary and secondary positions. We engage in hedging operations in relation to the currency risk of these positions,” said Asai.

For those who eagerly await a wall of Japanese insurance money to hit the project finance market, promise was provided when Nippon Life’s sector peer, Dai-Ichi Life, earlier this year committed US$52m via the secondary market purchase of a loan that finances an LNG plant in Qatar.

The paper was bought via a trust scheme. And again, while the ticket might be minuscule in relation to the insurer’s vast AUM base, the company placed €32m (US$32m) in a project loan backing a German wind farm, again via trust investment.

The trust bank route is a typical modus operandi for life insurers in Japan, whereby they act as intermediaries between foreign fund managers, the big public pension funds and other institutional clients.

However, their role in acting as intermediary for the life insurers that have recently developed an appetite for foreign PF is likely to diminish, as the lifers develop their own in-house investing skills – their intent is clear from the rapid addition of headcount to the specialist PF investment teams established over the past few years.

With their new approach to investment strategy, the Japanese life insurers are following a trend that has been established by Japanese banks. Starved of viable investment returns at home – particularly in recent years given the collapse of yen bond yields – the Japanese banks have branched out into foreign infrastructure financing, and have been a significant prop in the global project finance market, which saw overall deal volume decrease by almost 5% last year.

Nippon Life’s first forays into primary PF lending might seem small beans in relation to its mammoth balance sheet: an A$176m contribution to a A$766m refinancing of a desalination plant in Victoria in Australia; a US$170m ticket for a US$2.73bn greenfield rail and port financing in Mozambique and Malawi; and a slice of the US$1.8bn financing of a hospital in Ikitelli Istanbul, funded via a PPP scheme.

The last two of these were financed with credit wraps from Japanese export credit agency JBIC, although the Nippon Life team told PFI that they are capable of funding overseas PF on a standalone basis and their funding approach is conducted on a case-by-case basis.

“Although we have used credit wraps from the Japanese agencies, we have also lent on an unwrapped basis, and we consider each investment proposition on its own merits in relation to credit exposure,” said Asai.

Nippon life joined Mitsubishi UFJ, Mizuho Bank, Standard Chartered, SMBC and Sumitomo Mitsui Trust Bank in the Nacala railway and port infrastructure project in Mozambique and Malawi. JBIC provided a US$1.03bn loan, while the African Development Bank stumped up US$300m. There was also a US$1bn commercial tranche with insurance cover provided by Nippon Export and Investment Insurance, and another US$400m of commercial debt, covered by Export Credit Insurance Corporation of South Africa.

The Japanese insurance company participated in the US$1bn commercial piece of the transaction, which has political risk and commercial coverage from Nexi to the tune of 100% and 90% respectively.

In perhaps what might be regarded as a likely thread running through Nippon Life’s overseas project finance activities, one of the sponsors for the project was Mitsui & Co – which has partnered with Brazil’s Vale – and it would not be surprising to find Japanese sponsors at the top of the deals the company closes.

Those transactions that are a matter of public record do not, however, tell the whole story; Nippon Life has participated in deals that it has chosen to keep out of the public domain, indicating a more intense level of activity than demonstrated by the above transactions, and the scale of its ambitions in PF.

“In the past year we have closed seven deals for a combined US$1bn in total, all of which have come to a financial close. We have no clear priority in terms of targeted sectors, but we are mindful of the need for portfolio diversification, and one of our priorities is to lend to projects which have stable cashflow,” said Asai.

In fiscal year 2015, Nippon Life launched a three-year management plan – known as “Zen Shin” – which aims to establish a platform for medium to long-term growth over the next decade, with the aim of solidifying its status as Japan’s largest insurer and achieving a target of ¥100bn consolidated net income.

Its 2016 annual report states that the company looks to “[accelerate] the growth of the asset management business, boost overseas profits by increasing stakes in existing alliance partners and [investigate] new investments”. It is not difficult to see just how PF investment fits into this mission statement.

A key element of Zen Shin from the point of view of overseas investment is mindfulness of environmental, social and governance (ESG) concerns when committing funds to projects.

In a clear signal of its commitment to ESG, Nippon Life joined in March this year as a signatory to the United Nations-supported Principles for Responsible Investment, the London-based NGO that aims to foster the employment of ESG considerations among global institutional investors.

“We are cognisant of ESG factors when we establish new lending positions, and these are the core of our medium-term management goals,” said Asai.

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