Japanese life insurers are among the largest investors in the world, putting policyholders’ premiums to work in stocks and bonds to generate the cash they need to pay policyholders. Together, they control $3.4 trillion of assets, an amount almost equal to the GDP of Germany.
History shows that investing even a fraction of that amount in worthy development projects can lift millions of people out of poverty and protect them from the ravages of climate change. But Japan’s insurers are famously—and justly—risk-averse. They can’t take big losses, and their assets must match their liabilities. For example, they pay policyholders in Japanese yen, so they prefer to invest in yen.
Given those constraints, the euro-denominated debt of a state-owned company in South Africa, was a no-go for Japan’s institutional investors. The currency risk, combined with the country risk, disqualified the investment.
But Mizuho Financial Group, working with MIGA, found a way to tailor the debt so that it would appeal to Japanese insurers and banks. The transaction could be a model for unlocking trillions of yen for job-creating, green energy projects in developing nations, and for delivering higher returns for banks and insurance companies, which are struggling to find yield in a low-interest-rate world.
“Mizuho has shown how we can tap Japanese institutional investors to drive more investment into the developing world,” said Shuichi Hayashida, Head of Japan at MIGA. “They have tested and proven the structure, and they can duplicate it in other regions.”
The story of how Mizuho brought Japanese institutions into development begins in 2016, when Mizuho and other banks lent €470 million to the South African firm. MIGA, the insurance arm of the World Bank Group, guaranteed the loan against default, enabling the company to borrow in Euros and do so on more favorable terms.
Years later, Mizuho wanted to sell what remained of its participation in the loan to the company—about €155 million—to make more room on its balance sheet for new lending. Japanese life insurers were potential investors, but it was an unusual instrument for them. It carried more risk than they prefer, even with the backing of MIGA, mostly because a small part of the loan was not guaranteed, and it was denominated in Euros. If the Euro fell, the insurers would lose money on the debt, regardless of how the loan itself performed.
So, Mizuho bankers set about re-structuring the debt through a process called a repackaging, or a repack, as it’s known in financial markets.
The first step was to set up a special purpose vehicle and separate Mizuho’s loan into three classes of notes. Two classes would carry the MIGA guarantees. One would be denominated in dollars and another in yen. The third class wouldn’t carry the MIGA guarantees and would remain denominated in Euros.
Japanese institutional investors, Mizuho reasoned, would be interested in the two MIGA classes. Investors willing to take more risk in return for higher interest payments would purchase the remainder.
“Very often, investors don’t care to mix different types of risk,” said Mikey Nguyen, Head of Structured Trading and Financing at Mizuho in London. “We separated the risks.”
To split the loan, Mizuho needed buy-in from the guarantor: MIGA.
“We saw that this innovative structure would help Mizuho bring investment into development projects that otherwise wouldn't be available,” said Viktoriya Dzyuba, Senior Portfolio Officer at MIGA. “Mizuho would be able to do more transactions because they would be backed by all these institutional investors.”
After slicing the loan into two segments, Mizuho used a currency swap to convert the bulk of MIGA-backed portion from Euros to yen. They converted a smaller piece to dollars. Japanese insurers will often buy dollar-denominated debt, taking some currency risk, to earn a higher yield.
In a currency swap, two parties exchange set amounts of money in two different currencies, say €170 million for $200 million, implying an exchange rate of $1.18 per euro. The swap can stay in place for years, providing the parties with the currencies they require.
Safety and Yield
After gauging the appetite for the debt in various currencies, Mizuho chose to swap €109 million from euros to yen, an amount corresponding to the MIGA-backed loan. That part of the loan pays less than 1 percent, but it’s the safest for Japanese insurers because it’s backed by MIGA. Denominated in yen, it carries no currency risk.
Mizuho swapped another €43 million of the MIGA class into dollars. That portion pays about 2 percent, a bigger coupon because U.S. rates are higher, and there is currency risk. Mizuho found Japanese buyers for both classes of the MIGA-backed debt. A Japanese bank bought the yen portion, and an insurer bought the dollar-denominated part, Mizuho said.
That left a €7.8-million slice of the original loan that wasn’t backed by MIGA. Mizuho kept that in euros and sold it to an asset manager in Switzerland, who had more appetite for risk. That part of the loan is carried on a standalone basis by the company and backed by South Africa’s National Treasury. It pays a higher, floating interest rate.
“The success of the repack shows that debt can be tailored to different kinds of investors, helping governments and companies in young, developing nations tap new pools of capital while boosting returns for insurers with long-dated liabilities who need assets with matching duration,” said Deepti Jerath, Head of Institutional Investors at MIGA.
Nguyen at Mizuho agrees.
“If you sell debt in just one particular format, in one particular way, then you’re only going to reach one particular type of institution,” Nguyen said. “Maybe now this type of transaction will get done more often than it has been so far.”