LOS ANGELES -- In a move that has Japanese bank officials fuming, California rejected five of six Japanese banks' offers to provide credit support on next week's $4 billion revenue anticipation warrant sale.
But, the banks complain, the state accepted bids from all other financial institutions invited to participate -- banks located in the United States, Canada, and Europe.
The knowledge that the state invited 19 banking firms to submit bids, accepted 13, and rejected five -- all of them Japanese banks -- has caused a stir among the Japanese banks, prompting one Japanese bank official yesterday to complain about "second-class" treatment.
In what may amount to a consolation prize, however, Sumitomo Bank Ltd., the single Japanese bank accepted into the credit facility program, has been told to divvy up some of its share of the business with the five rejected banks, according to state Controller Gray Davis.
"Sumitomo Bank is fronting for five other Japanese banks," Davis told investors at a meeting Wednesday in Los Angeles. He is the state constitutional officer in charge of the standby warrant purchase agreements.
Sumitomo and the other 13 banks chosen by California will be listed in the offering memorandum as official members of the global bank syndicate. Membership is considered to be a high visibility position reflecting the potential for Sumitomo to make more profit on the deal than the rejected Japanese banks.
Bank of America, the lead bank in the syndicate, is expected to allocate the credit facility business today, said Anthony Taddey, managing director of BA Securities.
The "final composition of the syndicate will be determined" today, Taddey said. Also to be decided are "which banks are in the syndicate and what their percentage participation is."
Already evident, however, is the omission of the five Japanese banks from the final syndicate members' list printed in the Raws' preliminary official statement.
The spurned banks are Dai-Ichi Kangyo Bank of California, Mitsubishi Bank Ltd., Fuji Bank Ltd., Industrial Bank of Japan Ltd., and Sanwa Bank Ltd.
"Bankers are like doctors -- they can't say much," said Azar Shakeri, vice president for Sumitomo Bank, when asked to comment.
Discrimination Cited
Officials with several of the five other Japanese banks were much freer with their opinions, but on a not-for-attribution basis.
Being cast in the supporting player role, for reasons that are not clear to them, did not sit well with executives of the five Japanese banks.
Being in the subordinate group means that "we'll end up with a $25 million to $30 million chunk of the deal, as opposed to the $300 million to $500 million" that would have been assigned to members in the main credit syndicate, a Japanese bank official said.
"This is discrimination against the Japanese," the Japanese bank official said. "The Japanese banks are not going to forget this.
"Japanese banks have been a very important element in terms of investment for the state," said the official. "We have done a lot of deals over the years. Now California is treating the [Japanese] banks like second-class citizens."
Officials with other Japanese banks -- while saying that "Japan bashing" is too harsh to describe what is taking place -- nonetheless say they believe their banks were unfairly excluded from the main syndicate.
The five Japanese banks were placed in the separate category for sound business reasons, Taddey of BA Securities said in a telephone interview yesterday.
"Our advice to the state is simply going to be driven by one factor, and one factor only," Taddey said, and that is "which participants allow the state to attain the lowest cost of capital."
Taddey said, "The thought was that we would have Sumitomo as the lead fronting bank for all of the participants in the Japanese part of the credit syndication process." The decision meant that "for the purpose of disclosure to potential noteholders, the credit is all provided through Sumitomo as the fronting bank," he said.
"There was no reason to disclose fin the preliminary official statement] the names of those other banks that would be participating with Sumitomo," Taddey said.
Among the 14 banks that are providing the credit facility, the United States is represented by four banks, followed by Canada with three banks, France with two, Switzerland also with two, and one each for Germany, Japan, and the United Kingdom.
An informed source said the state purposely excluded the five Japanese banks from the main credit support bank because of a perception that investors would be more comfortable with American, Canadian, and European banks.
"The problem is that the buy side doesn't place the same trading value on the Japanese name as it does with some of the others," said the source, familiar with the situation but not affiliated with any Japanese bank. "It [also] has to do with the current state of arrears with the Japanese economy," which has creditworthiness implications.
The international consortium of financial institutions will provide credit support for one of two series of revenue anticipation warrants scheduled to be sold competitively next Wednesday. A second series will be sold unenhanced.
The participating banks have signed warrant purchase agreements similar to letters of credit that pledge to buy the Raws if the state cannot repay investors.
State Seeks High Rating
The state arranged the credit facility in an effort to give the enhanced portion of the revenue anticipation warrants the highest possible rating to assure investors that the Raws would be paid back in full when they mature on April 25, 1996. The state said the backing for the credit will cost it 40 basis points, or between $30 million and $35 million.
The three rating agencies are expected to assign ratings to the Raws today.
Taddey said the state has commitments totaling $7.4 billion from the financial institutions, even though the Raws issue only needs commitments of about $4.5 billion, covering principal and interest payments.
The-criteria used to exclude the five Japanese banks from the main syndicate relates to credit concerns, one source said.
"The concern the state had was a structural problem," the source said. "If a bank defaults on its obligation to pay its pro rata portion of the purchase price, the other banks do not have an obligation to make up the shortfall."
The source added: "The rating runs to the weakest link -- you look to the weakest link when you judge credit strength. The weakest link on the Japanese side was going to be a problem."
Standard & Poor's Corp. has four of the five Japanese banks on CreditWatch with negative implications, and assigns either A1 or A1-plus ratings to their short-term debt. Moody's Investors Service rates the short-term debt of the five Japanese banks MIG-1, and has the ratings of one of the banks under review. Standard & Poor's has a variety of outlooks, ranging from positive to negative, on the U.S., Canadian, and European financial institutions.
Sources said ratings might not be the only factor in placing the Japanese banks in a subordinate category.
"The state has the responsibility to get the best pricing" for the Raws, a source said. "The state has a fiduciary responsibility, and it might claim those Japanese banks are not trading very well, and because the deal was oversubscribed, we can use the high quality banks fin the syndicate]. The state is saying it doesn't need any low quality banks."
One source said early in the discussions several Japanese banks wanted to provide credit support at a discount price. The state even considered issuing one Raw series backed solely by Japanese bank credit support.
