Mitsubishi UFJ Financial Group makes its Africa move

As Japan takes a greater interest in Africa, so too does its biggest lender, Mitsubishi UFJ Financial Group (MUFG). The bank’s strengthening partnerships with African development finance institutions (DFIs) are not only a fruitful source of business, but are also furthering its aim of bringing the commercial bank and its securities arm closer together.

MUFG has been changing over the past decade, a process that has accelerated in the past two or three years. It has become noticeably more international, with more than half of its revenues now outside Japan. This is driven partly by general diversification of risk away from a low-growth domestic economy. It also acknowledges a need to offset currency volatility by investing in non-yen assets.

Balance sheet focus

As the world’s fourth largest (and the largest non-Chinese) bank by assets, with a relatively low loan-to-deposit ratio, MUFG has also decided to make its balance sheet work harder, focusing less on gross assets and revenues and more on return on equity.

Within that context, MUFG Securities, its securities subsidiary, has been working more closely with the core commercial bank. "Loan origination and capital markets activities have been combined into a joint origination team," says Jonathan Segal, head of Middle East and Africa debt capital markets at MUFG Securities. "Both trading floors have been put together, with joint distribution and a combined sales force for different products."

The combination works particularly well as the bank follows corporate Japan into new, emerging markets, with Africa, eastern Europe and Latin America the most recent priorities.

"MUFG is the most global Asian bank in terms of revenues and offices," says Christopher Marks, head of emerging markets, Europe, the Middle East and Africa (EMEA), at MUFG. "It's a manifestation of who Japan is globally, reflecting its current industrial strategy."

Following China's lead

Of course, it was China that led the way with the recent surge of foreign direct investment (FDI) into Africa, and Japan was rather late into the game. Nonetheless, Japan has stepped up the pace in the past three years and, while still a long way behind China in absolute project numbers, it now claims to be initiating ventures faster than anyone else on the continent.

In 2016 it held its sixth Tokyo International Conference on African Development, and the first staged in Africa itself – in Nairobi. Japan promised to invest $30bn over the next three years in African infrastructure and health systems via public-private partnerships. At around the same time, MUFG signed memoranda of understanding with the investment agencies of Kenya and Morocco.

Mr Marks notes that Chinese and Japanese attitudes to African infrastructure development are different. "The Chinese approach is led by government at a strategic level, with corporate activity hanging down off that," he says. "Japan pursues a purely commercial strategy, and so trading houses have to make their own way. But when they do a deal, government support follows."

Right place, right time 

While China has earned a reputation for the speed with which it can complete projects, Japan prefers to put the emphasis on quality. But the dynamics in Africa are changing, regardless of who you are.

"There's a move from growth based on primary resource export towards manufacturing and industrialising, with a deepening of the value chain," says Mr Marks. "The countries which have done best since 2010 are the most diversified, with manufacturing based on an increasing proportion of processing at home."

That shift up the technology curve suits Japan, creating opportunities in sectors such as automotive and aerospace. Toyota and Nissan have been long established in South Africa, where their operations are still largely assembly based. Car makers now believe Morocco will offer a viable scale of production, not merely as a domestic market but also as a base for exports to Europe. And when a major manufacturer sets up in Morocco, it will immediately be followed by 20 or 30 of its Japanese suppliers, Mr Marks points out.

Flexible friends

Development projects need to be financed one way or another, and it is only in the past couple of years that FDI has overtaken development assistance in Africa. It is here that African DFIs are playing an increasingly important role.

African Development Bank (AfDB) is the continent's largest DFI. Smaller but nimbler ones include Cairo-based African Export-Import Bank (Afreximbank), Africa Finance Corporation (AFC) and Trade & Development Bank (TDB). MUFG has gone out of its way to establish partnerships with them. "African DFIs have become extremely active in international financing markets," says Mr Segal. The bank has become a key supporter of the African DFIs in both loan and debt capital markets, he adds.

The regional African DFIs are characterised by flexibility and speed of decision-making. As such, they are willing to provide a range of risk-sharing instruments, often in innovative forms. "This capacity for innovation has been helpful in facilitating new investments by international parties, including the Japanese," says Mr Segal.

While the smaller African DFIs have targeted different regions in the past, they are taking more of a continental view. Afreximbank has always seen itself as a pan-African institution. While AFC is headquartered in Nigeria and began with a west African focus, it is now looking further afield to the east and the south. TDB used to be known as Eastern and Southern African TDB or PTA Bank. It is headquartered in Bujumbura, Burundi with regional offices in Nairobi and Harare, but is now expanding its portfolio westwards.

Because their balance sheets are relatively small, they have to partner with banks such as MUFG, which has supported a series of syndicated loans by DFIs. It also led Afreximbank's $100m debut samurai loan earlier this year, following investor marketing in Japan.

"We're more comfortable when DFIs get involved in a project," says Warren Withfield, director, syndications, in MUFG's EMEA debt capital markets division. "By coming in for longer tenors, they catalyse more investment from commercial banks."

Working together

The DFIs have been increasingly active in the debt capital markets recently, and here too MUFG has been getting involved. It has been bookrunner for all of Afreximbank's five bonds issued to date, and has been sole global coordinator for the bonds issued in 2016 and 2017.

Today, Afreximbank has $2.65bn outstanding across four bonds. The most recent, issued in June 2017, was a $750m seven-year Reg S deal with a 4.125% coupon. That was the longest tenor the issuer has ever achieved in US dollars, pricing tighter than its five-year bond launched a year earlier.

AFC has issued two bonds worth a total of $1.4bn and a $150m sukuk. MUFG acted as bookrunner on all transactions. The latest bond, which came to market in April, was a $500m seven-year 144A/Reg S issue. Its 3.875% coupon compared with the 4.375% offered by AFC's five-year bond sold two years earlier.

MUFG also acted as bookrunner for TDB's $500m five-year Reg S transaction in March. The issue, which carried a 5.375% coupon, was followed a month later by a $200m tap. Such was the demand that pricing was set inside the coupon, at 5.2%. Here again MUFG was bookrunner. In June, the bank executed a Russian rouble-denominated Uridashi placement for the AfDB with Japanese retail investors.

Recipients of recent DFI loans have included some of the highest risk countries on the continent, such as Zimbabwe, Malawi and Sudan. "A common theme to African loans and bonds is that they have been pushing out the boundaries of risk, in terms of tenors and individual jurisdictions," says Mr Segal. "That's because the DFIs have established significant credibility with international loan and bond investors."

It was an element of this that allowed MUFG to take Afreximbank to the samurai loan market. "Japan is not always comfortable with the risk profile in some areas of Africa," says Mr Segal. "We thought Afreximbank was the best candidate to take to the market. Because it is so active with Asian banks, Japanese banks felt comfortable with the risk."