Government-backed borrowers stay alert

INTERNATIONAL BOND ISSUANCE by Japanese borrowers has been rather meagre in recent years, particularly in non-yen currencies. In 2002, they raised just $8.3 billion in dollar- and euro-denominated bonds.

Historically, the most frequent visitors have been government-guaranteed borrowers that are permitted to issue a certain amount of debt backed by the Japanese finance ministry.

These bonds have a zero risk weighting according to the capital adequacy rules of the Bank for International Settlements (BIS), and are thus popular with institutional investors.

So far this year, though, the only government-backed offerings have been a ¥60 billion ($512 million) three-year offering from the Japan Bank for International Cooperation (JBIC) and a $500 million five-year bond by Japan Highway Public Corporation.

Meanwhile, apart from Toyota, the only Japanese corporate to have issued an international bond over the past year has been telecom NTT DoCoMO, which raised $100 million of five-year debt via Merrill Lynch in March 2003.

Japanese companies have cut back on capital spending because of the domestic recession, and have not needed to raise much. "Most Japanese firms are cutting back on their debt not increasing it," says Sally Wilkinson, head of debt research at Daiwa SMBC Securities in London.

And in the vast majority of cases, Japanese companies and banks have been able to raise funds much more cheaply in the domestic market.

Earlier this year, for example, single A rated Hitachi paid just 14 basis points over Japanese government bonds on a 10-year bond. This translated into a spread over dollar Libor of 20bp to 30bp. Debt syndicate heads in London say that Hitachi would have paid between 70bp and 80bp over Libor had it issued in the international market.

The difference has been particularly noticeable for Japanese banks. Sumitomo Bank, for example, currently pays about 70bp over Libor for yen-denominated subordinated debt. London-based bankers estimate that it would probably pay 250bp over Libor for the same debt in dollars or euros.

So will Japanese borrowers issue more international debt in the second half of 2003 or will they continue to focus on the domestic market?

Japanese treasury officials say that they remain interested in international debt issuance and are actively seeking funding opportunities. "We are planning to issue ¥500 billion this year," an official at the Tokyo Electric Power Company (TEPCO) tells Euromoney. "We have not yet decided which market we will use but there is always a possibility we will go international. We will be watching market conditions very closely."

The Development Bank of Japan (DBJ) is planning to issue ¥183 billion of government guaranteed bonds in the international markets, according to Tomoki Matusa, a treasury official. Its approach will be to focus on benchmarks but "DBJ is also interested in targeted deals", he says. "Global bonds are another option that is being considered. Having completed the necessary registration with the SEC, DBJ can issue bonds without prior SEC approval."

Of all Japanese issuers, JBIC is perhaps the keenest. It says it will be raising $2.2 billion in the international markets during the 2003 fiscal year - significantly more than the $480 million that it issued last year.

Japan Finance Corporation for Municipal Enterprises (JFM) wants to raise its international debt issuance from ¥70 billion to ¥140 billion according to Hajime Kazumoto.

Whether they hit these figures remains to be seen. The finance ministry only gives permits to borrowers to issue government-guaranteed bonds outside Japan if the cost of funds is less than it would be at home. This is likely to prove difficult. Demand for domestic fixed-income securities is extremely strong thanks to the weakness of the Japanese equity market, and stubbornly low yields on Japanese government bonds.

Since June 2002, the Nikkei Index has dropped from 12,000 to around 8000. The yield on the 10-year JGB, meanwhile, has declined from 1.4% to 0.65%. Supply is likely to be limited unless the Japanese economy picks up, and deflation ends - an unlikely prospect according to the DBJ.

"The Japanese economy continues to be in a lull," the DBJ noted in its Monthly Economic Notes for May 2003. "Capital spending has fallen and private consumption has become weak."

Demand for Japanese issues in the international market may rise too. There is some talk in the marketplace that Japan's sovereign risk rating will be upgraded. Meanwhile, one or two market observers predict that European and US index-linked funds will soon move from an underweight position in yen to a neutral position. But even if both of these things happen, the international market will still not be able to compete with the vast amounts of money flowing into the domestic market each day.

"US and European investors are looking for yield but with nothing like the intensity of their Japanese peers," says a Tokyo-based analyst. "Where else in the world do savings accounts pay less than 0.4% interest a year, and 30-year government bonds yield less than 1%?" he asks.

Investment bankers hoping to arrange international bond issues for Japanese borrowers will therefore need to be canny if they are to win mandates. Most insist that windows of opportunity will arise when the dollar/yen swap curve is just right and there are gaps in the global new-issue market.

Lower arranger fees might help too.