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Nomura loses underwriting deals as watchdog imposes penalty

Information leak proves costly for brokerage as huge Japan Post float looms

Koji Nagai, second from right, group CEO of Nomura Holdings, speaks at a news conference in Tokyo on May 24.

TOKYO -- More companies looking to raise capital are excluding Nomura Securities from underwriting operations, as the Japanese brokerage is penalized by a financial watchdog for leaking confidential information.

This puts pressure on parent Nomura Holdings as the third offering of shares owned by the government is slated for this fall.

Honda Finance, the finance unit of Honda Motor, dropped Nomura on Monday from its list of principal underwriters for 60 billion yen ($548.3 million) worth of corporate bonds scheduled for issue in June. The underwriters will be SMBC Nikko Securities, Daiwa Securities Group and Mizuho Securities.

"We dropped Nomura after considering various views, including the impact on investors," said Takashi Sugiyama, a Honda Finance executive.

The move comes amid revelations that a Nomura Securities employee shared sensitive information regarding restructuring of the Tokyo Stock Exchange with investors. Japan's Financial Services Agency announced Tuesday that it has issued business improvement orders to Nomura Securities and its parent.

The FSA criticized Nomura for lacking a commitment to legal compliance and urged the brokerage to take corrective action to better manage information and improve professional ethics among employees. 

Many companies prohibit themselves from doing business with other companies that are facing administrative sanctions. It is common for under-the-gun brokerages like Nomura to be temporarily excluded from being principal underwriters.

Last year, Mitsubishi UFJ Morgan Stanley Securities was prohibited from bond underwriting and stock brokerage operations after an employee was found to have manipulated prices in trading Japanese government bond futures.

Nomura may also be shunned until it submits an improvement plan to the FSA.

Meanwhile, Fuji Oil Holdings, which plans to issue subordinated corporate bonds worth about 35 billion yen, switched its principal underwriter from Nomura to Daiwa on Monday. The issue is vital to the company's effort to shore up finances following the purchase of Blommer Chocolate, a U.S. chocolate maker.

"We changed our principal underwriter considering the effect of the incident on our stakeholders, including investors in [our] stocks and corporate bonds," said a Fuji Oil representative.

Construction machinery maker Komatsu also dropped Nomura, naming Daiwa as sole principal underwriter for its 20 billion yen issue of five-year bonds, the terms of which are scheduled to be determined on Friday. Nomura had served as a principal underwriter of Komatsu's corporate debt in recent years.

Subway operator Tokyo Metro will also drop Nomura from underwriting corporate bonds scheduled to be floated in June.

Osaka Gas was among the first to drop Nomura immediately after Koji Nagai, group CEO of Nomura Holdings, held a news conference on May 24 to explain the information leak.

According to market data provider I-N Information Systems, Nomura was Japan's No. 2 underwriter in fiscal 2018 behind Mizuho Securities, backing 2 trillion yen of corporate bonds -- about one-fifth the total issued.

Still, Nomura is ranked second again this year, underwriting 495 billion yen of corporate bonds as of May 24.

Mizuho, Nomura and Mitsubishi UFJ Morgan Stanley have gone head to head in the underwriting business over the past few years. But if Nomura is excluded for long, the landscape of the corporate bond market may change.

Some investors are holding off working with Nomura for the purchase of outstanding and new debt. "We cannot place orders with Nomura until the FSA receives the brokerage's corrective measures," said a manager at a Japanese investment company.

An official with Nissay Asset Management said it is common to stop working with a brokerage that is subject to disciplinary action.

Market watchers will look for any spillover effects from corporate bonds to stocks, particularly with the float of Japan Post Holdings' shares this fall.

The Finance Ministry insists that brokerages have sound internal controls before being named principal underwriters for government securities. Because Nomura is being punished for lax controls, the ministry may deem it unfit for such a role.

If this happens, it remains to be seen whether the other underwriters have the capacity to handle Japan Post's float, which is expected to top 1.2 trillion yen. All will try to gain market share in the absence of Nomura, but are uncertain whether they can handle the massive float without Nomura's help.

Nomura handled about 500 billion yen worth of Japan Post Holdings shares in the first- and second-round offerings.

Parent Nomura Holdings logged a net loss of 100.4 billion yen -- its first loss in 10 years -- in the fiscal year ended March, based on U.S. accounting standards. The company hopes to return to profitability this fiscal year by restructuring overseas operations, including reducing the number of sales offices.

The information leak was revealed just as the brokerage was trying to turn earnings around. The key question now is whether Nomura can regain trust, as failing to win big underwriting projects could discourage its employees.

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