Debt Simplification and Increased Risk Complexity at Mitsubishi Corporation Finance PLC
by Alnoor Visram, General Manager – Finance and Operations, Mitsubishi Corporation Finance PLC
Founded in 1950, Mitsubishi Corporation has become Japan’s largest general trading company with over 200 locations in 80 countries worldwide. Mitsubishi employs a multinational workforce of approximately 60,000 people across 500 group companies. The company operates in virtually every industry, including energy, metals, machinery, chemicals, food and general merchandise.
Originally, Mitsubishi Corporation Finance PLC (MCF) in London, was established as an investment company; however, from mid 2006, it became the treasury centre for Mitsubishi’s business units in Europe. MCF uses SunGard’s AvantGard Quantum for front office, back office and accounting, and Reval® for revaluation and prospective hedge effectiveness calculations, with the intention of using it also for retrospective testing in the future.
Mitsubishi Corporation Finance Plc (MCF) in London, was established as an investment company; however, from mid 2006, it became the treasury centre for Mitsubishi's business units in Europe.
Financing at MCF
MCF issues medium term notes (MTNs) at fixed rates in London, mainly in JPY to investors in Japan which creates both interest rate and foreign exchange risks. To manage funding requirements and the associated risks, the funds are swapped into EUR or USD as appropriate. The MTNs have been of a complex structure in the past; however, due to the recent difficult market conditions and acceleration in the deterioration of credit quality impacting on market liquidity, it has become increasingly difficult to find opportunities to secure funding in Japan at a reasonable cost. The continuing global dislocation in financial markets in 2008, resulting in lower investor confidence, has impacted on MCF, and we are issuing less complex structured debt. MCF has therefore resorted to sourcing new forms of financing including issuing debt in other currencies, whenever market opportunities present themselves, such as in AUD and NZD, and swapping into the currency for which financing is required; however, this can still be expensive.
Although MCF deals only with highly-rated commercial banks to mitigate counterparty risk as far as possible, counterparty risk has not been high on the issues list in the past; however, due to the recent turmoil in the markets, MCF has started to look at this more closely.
From an accounting perspective, this means taking into consideration Credit Value Adjustment (CVAs) which has a significant impact on hedge effectiveness. Our auditors now insist that we include credit value adjustments (CVAs) in our valuations where these are material, which can easily render a hedge ineffective and cause volatility in the income statement. Spreads on CVAs can be very wide – often 200bps or more and although a particular bank may have a lower spread, they may not be providing funding, causing liquidity issues for businesses. Hedging counterparty risk using credit default swaps (CDS) is expensive and as MCF only deals with highly rated commercial banks, CDS are not appropriate for MCF presently.