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Moody's rates hinder

Japan banks'

overseas funding

TOKYO: Some Japanese banks' status as guarantors for foreign bond issues appears to be weakening due to poor ratings of their financial health by Moody's Investors Service Inc, foreign bank money dealers said on Friday.

Some face the chance of reductions in credit lines in addition to other difficulties in raising overseas funds, and this situation may well worsen, they said.

"We are reconsidering our position in light of the ratings and may reduce dealing with certain banks," said one dealer, who like others interviewed, did not want to be otherwise identified.

An article in Friday's Japanese financial daily Nikkei Kinyu Shimbun said Swiss franc warrant bonds launched by a Japanese company and guaranteed by a bank given a low Moody's rating are likely to carry an unusually high coupon to attract investors otherwise deterred by the bank's rating.

The coupon might even be higher than for some unguaranteed bonds, it said. Bonds guaranteed by a bank normally have lower coupons as they are considered safer than unguaranteed bonds.

Dealers were not surprised. "A problem we have long known about in the market finally surfaced with the rating. This is a natural result," one US bank dealer said.

He added that this was probably only the beginning, and within the next six months or so, other banks were likely to be in a similar position.

Moody's announced financial credit strength ratings for 50 Japanese banks on August 21. On a scale of A to E, many leading banks received D or D+ ratings, meaning they were seen having adequate financial strength, but might be limited by weak financial fundamentals or an unstable operating environment.

Of the 21 major banks, Bank of Tokyo, Mitsubishi and Sanwa Bank got the highest rating of C-plus. Several were rated E, which could cause serious fund-raising problems, dealers said.

"Even before the ratings were announced, some institutions were finding it hard to raise funds. This may make it virtually impossible for some of the weaker banks," one said.

He added that some Japanese banks already appeared to be paying interest rate premiums 1/8 point higher than other banks when taking part in long-term interest rate swap deals.

Interest-rate swaps involve the exchange of a fixed rate of interest on a notional principal amount for one on a floating basis against the same amount and in the same currency.

Some regional and city banks have been forced to pay higher interest rates or deposit collateral in the Euromarket since the Cosmo Shinyo Kumiai crisis earlier this month.

The Tokyo city government ordered Cosmo, a credit union, to halt some of business after a large run on its deposits. Tokyo governor Yukio Aoshima said the step was necessary to protect depositors and the stability of the financial system.

Some dealers said they were taking the ratings relatively calmly. "We will certainly use this as a reference, but currently have no plans for a new credit review as a result," one European bank dealer said.

But the situation could well get worse should Standard and Poor's (S&P), another large US rating agency, also give Japanese banks poor ratings, a US bank dealer said.

The day Moody's announced its ratings, S&P said it might cut those of five major banks due to what it sees as prolonged financial stress.

"A rate cut from S&P would have a large impact. Premiums for some banks could easily rise higher than 1/8 point, making their efforts to take foreign funds almost meaningless," the US bank dealer said.-Reuter