Sumitomo plans 1 trillion yen in bond issues to lift capital

Sumitomo Bank said Tuesday it plans to domestically float 1 trillion yen in subordinated bonds over the next 10 years to replenish its capital base, which is under pressure from bad loans.

The bank said it plans to issue 100 billion yen worth of the bonds within the current fiscal year, which ends March 31, 2001, and an equal amount in each of the following nine fiscal years.

The 10-year subordinated bonds can be redeemed only upon reaching maturity but will give investors a higher yield than other fixed-income investment tools available on the Japanese capital market.

“We will seek to raise our capital in a stable and smooth manner . . . since our outstanding subordinated loans and bonds will be steadily coming due in the future,” the bank said.

Sumitomo wants to offset a fall in its capital-adequacy ratio with the planned public offering, as the maturity periods of outstanding subordinated loans issued in the past, mainly to life insurance companies, are approaching.

Under the accounting rules of the Basel-based Bank for International Settlements, banks operating internationally are required to maintain capital levels of at least 8 percent of their outstanding loans as a cushion against defaulting on their deposits and other liabilities.

The BIS rules allow banks to count subordinated bonds as a complementary capital-raising item under the Tier 2 portion of their capital. The rules allow 100 percent of the money raised through the sale of both subordinated bonds and loans to be counted as Tier 2 capital.

Sumitomo reported a parent-only capital-adequacy ratio of 12.25 percent in closing its midterm books on Sept. 30, 1999.

The bank plans to sell the subordinated bonds mainly to trust banks, wealthy individuals and life insurers entrusted with managing pension funds, with the minimum investment set at 100 million yen, the officials said.