Nomura raises $4.4 billion from second share sale this year

Nomura Holdings has raised ¥395.2 billion ($4.4 billion) from its second follow-on share sale this year after fixing the offer price at a 4.1% discount to yesterday's closing price. The deal size may increase to $5.1 billion if the 15% overallotment option is exercised in full.

The Japanese bank has told investors that it plans to use the funds to strengthen its overseas operations, primarily in the US. At the end of 2008, Nomura acquired Lehman Brothers' bankrupt operations in Asia and Europe, but missed out on the US business which went to Barclays.

By the end of the week-long offering period, investors had come around to the bank's view that it needed more capital than anticipated when it raised funds in March and that it would be better off to sell shares early -- before other Japanese banks may also need to return to the equity market. According to a source, the deal was about five times covered, with particularly strong interest from international investors.

When the share sale was first announced on September 24, however, investors were quite shocked that Nomura would need to come to the market twice in seven months -- prior to the March offering it hadn't sold new shares in 20 years -- and also by the size of the second offering. They reacted by dumping Nomura stock in the market. The share price tumbled 16% in a single session and a further 5.8% the following day, shaving $4.2 billion off its market cap.

Given that the bank had already raised $3 billion from an equity sale that diluted existing investors by about 38% in March, the reaction wasn't that surprising, especially since Nomura indicated that this latest offering would dilute its existing share capital by a further 30%. Investors who bought into the first offering would likely have done so amid a belief that there would be no further capital raisings in the foreseeable future. Indeed, that was likely Nomura's intention at the time as well.

A banker close to the offering said the situation has changed recently, though, with bodies like the Group of 20 countries now calling for banks globally to strengthen their core capital ratios even further. If that becomes a reality, then there could be a lot more equity issuance in the coming 12 months by banks globally, resulting in a fight for investor attention. On top of that, there is also a lot of corporate issuance expected in Japan.

"I think Nomura's view is: there is going to be a lot of fundraisings and, given that, we should bite the bullet. We will take some criticism for this, but we better go now. We better do this again," the banker said. "I think people will look back on this and say that was probably a good decision."

Indeed, while Nomura has acted very quickly to ensure it will have enough capital whatever happens, there is a growing belief that other Japanese banks too will come under pressure to raise more equity, despite their massive share sales over the past 12 months. This is particularly true for Mitsubishi UFJ Financial Group (MUFG) and Mizuho Financial Group, but possibly also for Sumitomo Mitsui Financial Group (SMFG). The expectation is that these banks won't be returning to the market until next year, however. This marks a sharp turnaround from just five to six weeks ago when the widespread view among analysts and bankers was that the Japanese financial sector had finished raising equity and that the focus in the equity capital markets would now turn to corporate issuers.

Including Nomura's earlier deal, Japan's top four banks have tapped the equity markets for a combined $22.5 billion since December last year, including SMFG's $9.1 billion offering in June, which was the largest-ever capital raising by a Japanese bank.

Nomura's second share sale may by itself also lead to increased equity issuance by Japanese corporates since the firm-- which is essentially regarded as the preeminent capital markets bank in Japan -- is returning to the market twice in seven months after an absence of 20 years is likely to set off alarm bells about the need for other companies to strengthen their capital positions as well. Yesterday, Mazda Motor Corp said it aims to raise up to ¥96 billion ($1.1 billion) from a combination of new and existing shares amid forecasts of a second straight annual loss. The money will be used to develop less polluting cars and to improve its financial position, according to media reports quoting a company statement to the Tokyo Stock Exchange.

Japanese corporates would do well to communicate their capital-raising intentions to investors as early as possible so as to perhaps avoid a negative reaction on the scale of what Nomura was faced with during the early part of its roadshow. However, the bank went all out to convince investors that this was the right thing to do, including putting 11 separate teams on the road to meet potential buyers in Europe, the US and Asia, and it managed to turn the sentiment around in time to successfully complete the deal.

Arguably the sharp drop in the share price made the deal a lot more interesting to investors and yesterday, ahead of the pricing, there was even a squeeze in the share price when hedge funds and other players who may have been short of the stock started to worry that they may not get as large an allocation as they had planned for. The share price jumped 10.9% to ¥592, which in one surprise move put Nomura in a position to raise more than $5 billion if the overallotment option is exercised. At the end of last week, observers suggested that the total proceeds would end up between $4 billion and $5 billion -- and most likely around the mid-point. When the deal was first announced, Nomura indicated that it would raise as much as $5.6 billion. However, share prices typically come off during Japanese share sales and since the number of shares are fixed at launch, the final proceeds tends to be lower than first indications.

Nomura sold 695.7 million shares at a price of ¥568 apiece. Including the overallotment, the number of shares will increase to 800 million, of which 50% will go to international investors and 50% to domestic investors -- primarily retail accounts.

According to the source, the international portion was estimated to have been eight to 10 times covered -- although orders were assumed to have been inflated due to indications of good demand -- while the domestic tranche attracted orders for about three times the number of shares on offer.

The 4.1% discount to yesterday's closing price was in the middle of the 3%-5% discount that had been indicated by the company during the roadshow, which was likely a direct reflection of the sharp rise in the share price on the final day. In a research note issued when the deal was first announced, Goldman Sachs noted that the average placement discount for Japanese financial institutions this year has been 9.3%, although the 13.2% drop in Nomura's share price between announcement and pricing was definitely greater than the norm. During the marketing of Nomura's first share sale in March, the share price gained 3.9%.

Between March and June, the share price more than doubled to a high of ¥896 before starting to trade sideways with a slight downward bias.

Nomura Securities acted as the sole global coordinator and sole bookrunner. J.P. Morgan was the co-lead for the international offering and Mitsubishi UFJ Securities was the co-lead for the domestic portion, with a few other banks, including Mizuho Securities, participating in lesser roles. Nikko Cordial arranged the retail portion of the deal.