Saturday, 19 January 2019

Norinchukin – Outward looking

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Since its founding in 1923 Norinchukin has looked onshore for its investments, but it has begun to branch out overseas and into the project finance lending market as a means to diversify its investment base and to enhance returns. ByJonathan Rogers.

Japan’s Norinchukin Bank, the Tokyo-headquartered co-operative bank, exists essentially to support the country’s agricultural industry, and the core of its mandate is to achieve a solid investment return for its members, which comprise 5,612 cooperatives in Japan as well individuals who work in the country’s agriculture, fishery and forestry industries.

Traditionally, the bank has taken a relatively conservative stance towards investing, trying to earn a spread between the deposit rate it returns to customers while investing in government bonds – Norinchukin has a sizeable US Treasury bond portfolio – securitisations, stocks, private equity and property.

According to its website: “The Norinchukin Bank plays a major role in Japanese society as a contributor to the development of the nation’s economy and as a supporter of the advancement of the agricultural, fisheries and forestry industries with facilitated finance for its members.”

These members include Japan Agricultural (JA), Japan Fishery (JF) and Japan Forestry Cooperatives (JForest) cooperatives.

Norinchukin, which is one of Japan’s largest banks outside the three mega banks, is fully aligned with the growing zeitgeist of environmental, social and governance (ESG) via its mission statement, which commits it to corporate social responsibility, concern for environmental issues and a contribution to realising a sustainable society.

That overt alignment with ESG converges with the often thorny issue of quite how project finance interacts with the principles of that arena, particularly in areas such as population displacement and environmental degradation, where it would be true to say that PF has a less than auspicious track record. And Norinchukin’s activity in project finance has certainly not been free of controversy, as we shall discover below.

Norinchukin’s total assets amount to ¥108trn (US$980bn) and the bank is staffed by 3,600 employees.

Again, since its founding in 1923, Norinchukin has looked onshore for its investments, but it has begun to branch out overseas and into the project finance lending market as a means to diversify its investment base and to enhance returns.

That outward-looking dynamic acquired greater vindication under the ultra-easy money policy of the Bank of Japan – the central bank adopted a –0.1% policy rate in January 2016 – which drove yields on Japanese government bonds into negative territory and crimped returns on fixed income yen assets.

“Looking beyond Japan is a development of banks’ business models resulting from declining domestic spreads. Another major factor was the retreat of European banks from the sector, leaving the Japanese banks to fill the void,” said Kazuhide Tanaka, head of funding at Rabobank in Tokyo.

Norinchukin has well-established branches in New York, London and Singapore, opened an office in Sydney in September 2017 and plans to open a branch in Amsterdam in late 2019.

These local branches have helped the bank’s forays into the overseas PF market and if any of its ventures overseas stand out, it is the Sydney operation, which has blazed a trail for Norinchukin in the Australian project finance arena.

Norinchukin’s Sydney operation – from where it covers PF in Australia and New Zealand through a team of 10 specialists – has undoubtedly gained momentum through the hiring in March of this year of Manabu Sawa, who joined the bank as senior manager for project and asset finance after 10 years at Mizuho Bank, having spent the last 5.5 years with the bank in Sydney, where he ran project finance.

Norinchukin’s move into Australia formed part of a trend for Japanese lenders to seek business diversification down under, with Mitsubishi UFJ and Sumitomo having established subsidiaries in Sydney, as well as Mizuho.

Perhaps Australia is a good place to start when getting the measure of Norinchukin’s overseas expansion, since the market for PF in the region has been registering surging growth over the past few years.

Total PF volume in Australia charged ahead by a staggering 62% last year with 34 deals worth US$414.9bn.

“Australia’s a comfortable place to be, project finance-wise. There is a long history in the sector, the availability of choice projects in growing sectors such as solar and wind, and a solid regulatory backdrop,” said a Hong Kong-based loans banker.

Norinchukin’s decision to enter the Australian market made eminent business sense: returns are relatively high in relation to other developed markets and the arena is sophisticated with an established track record and regarded as a secure target for inbound capital.

Meanwhile, a seemingly secular trend for flat-lining productivity in Australia together with a growing population indicates there will be a rising need for infrastructure investment from external sources of capital as local government balance sheets are stretched to the limit.

Norinchukin was already active in Australian project finance in 2017 when it participated in acquisition loans for wires and poles companies AusGrid and TransGrid. The bank also dipped its toe into Aussie PF in June last year when it appeared as MLA on a A$5.9bn (US$4.5bn) loan to fund the A$7.62bn acquisition of New South Wales-based power grid Endeavour Energy via a consortium led by Macquarie Bank.

Since those deals were closed, financing conditions have tightened, with floating-rate benchmarks on the rise thanks to a tightening Federal Reserve stance, and project sponsors have been looking to lock in refinancing before rates rise further.

The A$4bn (US$3bn) TransGrid financing was one such candidate, with a Hastings Fund Management-led consortium closing in June the refinancing of a multi-tranche loan with three and seven-year tenors in which Norinchukin participated.

And in the same month, Queensland Investment Corp successfully refinanced the acquisition loan used to purchase the Iona gas plant, with Norinchukin stepping up again for the seven-year refi together with 10 other banks including local lenders ANZ and CBA.

Earlier, the exciting prospect of Australian PF finding the Japanese bid via the Ninja loan market – paper originated in foreign currency from overseas borrowers and syndicated in Japan – was manifested in April via the refinancing of the Sydney desalination plant in April.

An 11-year Ninja loan comprising a A$500m tranche of a A$1.68bn refinancing was joined by Norinchukin, earning the bank 170bp over BBSY for the privilege.

Issuance in the Ninja loan market is set to hit an all-time high this year – some US$2.58bn had been printed as of October, double 2017’s volume – as contractions this year in yen cross-currency basis swaps has allowed substantial positive carry against the parsimonious yields available domestically in Japan.

Norinchukin’s participation in early 2018 in a loan for the US$1.7bn coal expansion Tanjung Jati power project in Indonesia could be regarded as controversial.

The project, backed by a consortium of the big three Japanese banks – Mizuho, Bank of Tokyo-Mitsubishi UFJ and SMBC – and with the support of the Japan Bank for International Cooperation (JBIC) has been opposed by civil society groups given the risk it presents to air pollution and damage to the local environment.

EMEA has proved a fertile source of project finance loan paper for Norinchukin in 2018, with the bank participating as a lender or interested bid consortium member in a range of project finance deals in the UK and Saudi Arabia.

More in harmony with Norinchukin’s ESG mission statement was its presence in April on the £287m 12-year refinancing of the Westermouth Rough wind farm, situated on the North Sea coast, where it joined MUFJ, Siemens Bank and Societe Generale on a tranche backed by JBIC.

The same could be said for the bank’s presence on the mammoth £3.5bn 1218MW Hornsea 1 offshore wind farm project, which achieved financial close in late November. That might be considered an achievement in the context that pricing was fixed on the day that the UK’s formal Brexit proposal was announced.

Norinchukin also added to its portfolio of UK wind farm paper by participating in the £743m PF loan to fund the 950MW Moray East offshore wind farm, notable for the lowest MWh strike price seen in a wind farm project deal from the UK market.

And the bank added to its UK power asset portfolio in May by signing up to the £180.6m Burbo Bank offshore transmission owner (OFTO) scheme, booking 20-year loan paper for a Libor plus 125bp return.

The bank’s presence as part of bidding consortia in PF deals in Saudi Arabia in 2018 would have represented a welcome injection of overseas capital, given the onshore challenges that the Middle East’s project finance sector has experienced over the past few years in the face of lower oil prices, rising fiscal deficits – in Saudi the deficit is estimated to be 20% of GDP – and local interest rates prompting a consequent drying up of local liquidity.

Despite this challenging backdrop, as in the Australian market, there is a structural need for infrastructure investment in the face of a rapidly expanding population and funding increasingly relies on the private sector as government coffers are depleted.

There has been hefty price competition for PF funds in the Middle East, particularly in the renewables sector, something that was manifest this year in the ongoing tender for the 400MW Dumat Al Jandal wind farm in Saudi Arabia.

Norinchukin joined the EDF Renewables/Masdar team, which late last month became the first shortlisted bidder for the project, with a coterie of rival teams attempting to undercut with ultra-low tariff proposals ranging from US$0.02127 per kWh (the EDF team bid) to US$0.02364.

And while Norinchukin has not participated in any deals in Saudi Arabia that have reached financial close in 2018, its consortium presence at the bidding stage of a number of deals means the inking of trades in the kingdom is simply a formality.

This would be true of the 300MW US$320m Sakaka solar PV scheme that reached financial close at the end of November and that Norinchukin is expected to join.

Norinchukin’s participation in project finance outside Japan’s borders has in many cases involved lending to projects backed by JBIC involvement; this is entirely logical from a risk perspective, even though as a lender, Norinchukin has primarily picked up loan assets in countries with a relatively low level of political risk.

As the bank solidifies its overseas PF activity, it will be interesting to see whether it moves down the credit curve into countries where JBIC’s political risk assurance is required as a necessary precursor to Norinchukin’s involvement.

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