Toyota’s new hybrids should have stayed in the lab

June 2, 2015

The author is a Breakingviews columnist. The opinions expressed are his own.

Toyota’s new convertibles should have stayed in the lab. The world’s top automaker, courting long-term investors, has cobbled together a jalopy-style security that does little for Toyota and disadvantages existing shareholders. Better hope that Japan Inc. doesn’t follow suit.

The Model AA securities, named for the Japanese equivalent of the Ford Model T, can only be transferred with Toyota’s permission, making local retail investors the obvious buyers. Dividends, starting at 0.5 percent, are much lower than on ordinary shares, but ratchet up by the same amount annually for five years. After that, holders can convert them into ordinary shares or cash. Highly unusually, they carry voting rights from the start.

Why bother? The $235 billion behemoth says it is seeking funds from far-sighted investors whose time horizons match its own. Fine, but since it is simultaneously buying back as much common stock, the net proceeds will only match the premium for the new issue.

At a proposed markup of at least 20 percent over Toyota’s ordinary shares, that means the new issue will bring in 290 billion yen ($2.3 billion), says Institutional Shareholder Services, which is not a fan. That’s peanuts for a group that plans to plough 2.25 trillion yen into capital expenditure and research in 2016. Rock-solid Toyota hardly needs new capital anyway. If it did, it could borrow very cheaply, or sell conventional convertible bonds more expensively.

Still, this is good politics: short-termism is a dirty word the world over, and making Toyota’s shareholder base stickier could be a way to pre-empt the exit of some other long-term holders, notably Japanese banks.

ISS frets this could distance Toyota from ordinary shareholders. Indeed: Japanese pensioners with tiny holdings pose less of a headache to bosses than pointy-headed foreign fund managers. At least the damage will be limited, because the AAs will account for less than 5 percent of Toyota’s shares.

The bigger risk is that Toyota, a trailblazer for corporate Japan, inspires imitators to replace bigger chunks of their capital structure with AA-type instruments. A former Sony executive has already suggested the electronics giant should issue similar securities. But this is one Toyota design that is not worth copying.

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