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By Makiko Yamazaki and Yuki Nitta
TOKYO, April 22 (Reuters) - When Japan's biggest banks helped finance a $34 billion deal last year for medical supply maker Medline, one of the largest leveraged buyouts since the financial crisis, the famously cautious lenders signalled their ambitions in riskier, and more lucrative, low-grade U.S. debt.
Mitsubishi UFJ Financial Group Inc, Mizuho Financial Group Inc and Sumitomo Mitsui Financial Group Inc, eagerly hunting yield abroad after years of zero rates at home, have beefed up U.S. operations and are now targeting business there lending to lower-rated borrowers and underwriting junk bonds.
But their timing - when interest rates are rising and the high-yield debt market is slowing - means they will face increasing risks and dwindling opportunities, testing their staying power.
"We'll need to closely monitor the course of the markets following the latest contraction," said Shinichi Sato, an executive officer at Mitsubishi UFJ, Japan's biggest lender.
He was nevertheless positive about the prospects: "The market for non-investment grade financing will likely remain on a growth trend."
The big Japanese banks still have a long way to go to become major players in the market.
Mitsubishi UFJ, which has a tie-up with Morgan Stanley , had a 1.6% share of the estimated $18 billion fees in the non-investment grade debt market last year, according to Dealogic, the most of any Japanese bank.
It aims to move up five spots in the league table for non-investment grade bonds and loan syndication in the next two years, to 12th place.
LOCAL KNOWLEDGE
Because non-investment grade borrowers are seen as more likely to default, deals require closer attention to local conditions, bankers say.
Developing that expertise has been a challenge for Japanese banks, requiring more reliance on local staff and adoption of a faster-moving business culture, they say.
Mizuho has expanded its presence in the United States following its 2015 acquisition of Royal Bank of Scotland's North American corporate loan portfolio, where it also brought on board some 150 former RBS bankers.
"U.S. banks and investment banks are cutting edge in terms of their business models and governance, and we have developed our presence with talented bankers joining Mizuho," said Yusuke Kasamatsu, a senior Mizuho banker.
"We took on board their perspective and raised our game."
It bolstered ties with investment-grade clients and then reached out to lower-rated borrowers as it deepened its knowledge, Kasamatsu said.