Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

HK Type 4 license through Ballingal Investment Advisors Ltd. ("BIA" or "BIAL")

BACKGROUND
I have 20+yrs experience in Asia doing alternative strategies (i.e. non-delta1 non long-only) in fixed income, equity derivatives, and activist/catalyst/event-driven and long-short equity strategies with most of that time spent managing money. 

4 years in fixed income macro, 8 years running internal hedge fund and 4yrs investment banking at Citi in Japan, 3 years running an Asia multi-strat portfolio at a hedge fund, 4+yrs as an independent special situations analyst.

Pan-Asia Catalysts/Events

Toyota – Solid State Batteries and Long Toyota as a Safer Short on the EV Bubble

Toyota – Strengthening Autonomous with Aurora Partnership

TOYOTA UPDATE: ISS Comes Out Against Model AA Shares - So Should You

Know Your AAs, Bs and Cs - Who is FOR and who is AGAINST Model AA Shares?

'Model AA' Shares - Good Governance Gone Bad?

Quiddity Advisors

Event-Driven

<div>
<p>Five and a half years ago, after the close of trading just before Golden Week on Tuesday April 28, 2015, <a href="https://www.smartkarma.com/entities/toyota-motor-corp" target="_blank" data-smartkarma-citation="entities:73:1" rel="noopener">Toyota Motor (7203 JP)</a><a href="http://www.toyota-global.com/investors/stock_information_ratings/share_2015/pdf/commonstock_20150428_01.pdf" target="_blank" rel="noopener">announced</a> the board had resolved to submit to shareholders a resolution to partially amend the company's Articles of Incorporation to allow the company to allow issue a new series of shares, which they called "Model AA Shares", so named as the first in a series of preferred shares named after the company's first production car released in 1936.</p>
<p>The announcement noted a first tranche of ¥500 billion, and possible future tranches of this shiny new security. </p>
<section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/178/310/original/Model%20AA%20color.jpg?1607935517" class="editor-image img-responsive" data-smartkarma-image-id="178310"></figure><p></p></section><section class="figure">The securities were to be unlisted, non-transferable, convertible, puttable, and callable. The strike price was up about 30-odd percent - about where a zero coupon convertible bond would have been priced. They were, in effect, a private convertible bond. With voting rights. And a dividend. </section>
</div><div><p>My first reaction was "Huh?"</p></div><div>
<p>After reading all the materials a second, third, and fourth time - in both Japanese and English - given the 15+yrs' experience I then had of looking at the microstructure of Japanese markets, special situations, unusual security issuances, and governance, my reaction evolved to a more considered, and evolved "Huh???"</p>
<h3>They were, unfortunately, a governance disaster.</h3>
<p></p>
<section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/178/311/original/toyota%20model%20AA%20ugly.jpg?1607935529" class="editor-image img-responsive" data-smartkarma-image-id="178311"></figure><p></p></section><p>The excuse used for issuing them was that Toyota needed the ¥500 billion of funding to invest in cutting-edge technology. Somehow the ¥3 trillion net cash position was not enough. Funny enough, the company immediately decided it did not need all that cash or cutting edge technologies and announced a ¥600 billion buyback to go with this issuance. Then they announced <em>another</em> ¥300 billion buyback before it was approved. Raising capital was <em>not</em> the reason why they were issued.</p>
<p>The issuance was UNECONOMIC, ILLOGICAL, UNNECESSARY, and UNFAIR. And I believed it clearly violated the new Japan Corporate Governance Code. Economically, it was issued at worse terms than a convertible bond would have been issued. It also involved relatively significant fees (see <a href="https://www.smartkarma.com/insights/toyota-aa-shares-happy-now-6-10yrs-of-dividend-differentials-paid-in-fees-to-nomura" target="_blank" data-smartkarma-citation="insights:1009" rel="noopener">TOYOTA AA-SHARES: Happy Now? 6-10yrs of dividend differentials paid in fees to Nomura</a>). There was literally no good reason for their issuance.</p>
<h3>Today, Toyota made an <a href="https://global.toyota/en/newsroom/corporate/34508205.html" target="_blank" rel="noopener">announcement</a>.</h3>
<p>The Company effectively seems to take credit for the development of stewardship and governance in Japan. </p>
<section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/178/312/original/Screenshot%202020-12-14%20at%204.48.58%20PM.png?1607935761" class="editor-image img-responsive" data-smartkarma-image-id="178312"></figure></section><p>Harumph. </p>
<p>Not quite. </p>
</div>


Five and a half years ago, after the close of trading just before Golden Week on Tuesday April 28, 2015, Toyota Motor (7203 JP)announced the board had resolved to submit to shareholders a resolution to partially amend the company's Articles of Incorporation to allow the company to allow issue a new series of shares, which they called "Model AA Shares", so named as the first in a series of preferred shares named after the company's first production car released in 1936.
The announcement noted a first tranche of ¥500 billion, and possible future tranches of this shiny new security. 
The securities were to be unlisted, non-transferable, convertible, puttable, and callable. The strike price was up about 30-odd percent - about where a zero coupon convertible bond would have been priced. They were, in effect, a private convertible bond. With voting rights. And a dividend. 
My first reaction was "Huh?"
After reading all the materials a second, third, and fourth time - in both Japanese and English - given the 15+yrs' experience I then had of looking at the microstructure of Japanese markets, special situations, unusual security issuances, and governance, my reaction evolved to a more considered, and evolved "Huh???"
They were, unfortunately, a governance disaster.

The excuse used for issuing them was that Toyota needed the ¥500 billion of funding to invest in cutting-edge technology. Somehow the ¥3 trillion net cash position was not enough. Funny enough, the company immediately decided it did not need all that cash or cutting edge technologies and announced a ¥600 billion buyback to go with this issuance. Then they announced another ¥300 billion buyback before it was approved. Raising capital was not the reason why they were issued.
The issuance was UNECONOMIC, ILLOGICAL, UNNECESSARY, and UNFAIR. And I believed it clearly violated the new Japan Corporate Governance Code. Economically, it was issued at worse terms than a convertible bond would have been issued. It also involved relatively significant fees (see TOYOTA AA-SHARES: Happy Now? 6-10yrs of dividend differentials paid in fees to Nomura). There was literally no good reason for their issuance.
Today, Toyota made an announcement.
The Company effectively seems to take credit for the development of stewardship and governance in Japan. 
Harumph. 
Not quite. 


Toyota Model AA Shares - Good Riddance to Bad Governance