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For most of the 1990s the Euroyen market has been a shadow of
its former self. The primary market hit a spectacular low in 1998.
From $55.1 billion worth of business in 1995, Euroyen issuance for
1998 was only $19.3 billion. The market continued to languish in
the first half of 1999, only to be revived in spectacular fashion
towards the end of last year by a string of supranational deals
spearheaded by the Inter-American Development Bank. Euroyen deals
in 1999 (up to November 24) total ¥2,572.5 billion ($24.2 billion).
As well as the upswing in issuance, the Euroyen market has been the
best-performing secondary bond market in the world this year and
has suddenly found itself to be the darling of the capital markets.
Suddenly investors have been rushing into the market, issuers
have been trying to take advantage of this demand and underwriters
have been battling it out for mandates. With a successful deal by
Toyota Motor Credit Corp in November, there are the first signs of
the development of a yen-denominated corporate credit market.
Euroyen bonds' previous unpopularity with issuers and
investors started in 1995 and 1996, with a combination of very low
interest rates and a weakening currency. Doubts about the Japanese
economy and the level of government borrowing curtailed
international demand. Moody's even removed its triple-A rating for
Japan over concerns about the credit quality of the financial
system.
Issuers were also reluctant to enter the Euroyen market.
Unfavourable dollar/yen swap rates meant that it was very expensive
for international issuers to borrow in yen unless they intended to
keep the currency.
The recovery began when Japan announced
stronger-than-expected GDP figures for the first quarter of 1999,
and the yen surged ahead against the dollar. The government
undertook a restructuring of the financial system, reforming and
recapitalizing the banks and triggering several large bank mergers.
International investors could have been reaping returns of up to
14% if they had bought into yen bonds, although few had taken this
position.
"A lot of investors were short yen exposure and were happy
with this position at the start of the year," says Stuart McGregor
of Merrill Lynch's European syndicate. But as credit and currency
worries about Japan began to ease, investment banks such as Morgan
Stanley, Merrill Lynch, Lehman Brothers and Salomon Smith Barney
increased the weighting of yen in the investment indices. From a
weighting of between 10% and 15%, yen was increased to over 25% in
many indices. Investors tracking such indices, many of which had
been underweight in yen anyway, suddenly needed to buy considerable
amounts of yen-denominated paper.
Meanwhile, Euroyen and domestic spreads were again converging
- domestic spreads tightening on the back of an improved credit
outlook, and international spreads widening because of widening
swap spreads. This began to attract domestic investors to Euroyen,
hunting for extra yield. Older Euroyen issues had been keenly
bought, with some trading through JGBs, and the market was ripe for
new issues by the summer of last year.
It now required one issuer to break the stalemate and refocus
attention on the asset class. The Inter-American Development Bank
(IADB) was in a privileged position to be able to take advantage of
the rise in demand for yen. It was able to brave the market without
having to worry about swap rates, as it needed yen to service an
upcoming yen bond redemption. The swap rates that had meant it was
beneficial to finance yen requirement in dollars had changed and
any arbitrage had disappeared. Also, with the introduction of the
FAS 133 rule, the IADB wanted to limit the growth of its swaps
book.
The 10-year ¥100 billion deal, launched on June 28, was a
global issue with a 1.9% coupon and a spread of 13 basis points
over JGBs. It is seen as the catalyst for reopening of the Euroyen
market, although the borrower admitted at the time that the deal
was "a bit of a nerve-wracker". There had been no significant
Euroyen issues for 16 months, but the IADB's gamble paid off.
"The IADB deal highlighted to a much greater audience of
issuers and underwriters the investor demand for yen," says Robert
Rooney, head of the European syndicate at Morgan Stanley, the
joint-bookrunner on the deal with Tokyo-Mitsubishi International.
He describes this demand as "a riot for paper", sufficient for the
deal to be reopened on October 4, raising an additional ¥50
billion.
Over half of the deal was sold to international investors,
but the paper also attracted demand in Japan. "There was an
opportunity to get domestic Japanese demand for Euroyen. Spreads in
the domestic market had become very tight," says Denis Kelleher,
head of debt syndicate at Tokyo-Mitsubishi.
Two days later KfW entered the Euroyen market with a ¥50
billion 10-year deal, with a 2.05% coupon and priced at 10bp over
JGBs. Nomura was the sole bookrunner and sold paper mainly to
Europe and the US, though the 2% coupon also generated good demand
among Japanese investors.
After the summer holiday lull, the revival of Euroyen
issuance continued with the European Investment Bank launching a
¥75 billion five-year deal at the end of October. Morgan Stanley,
the sole bookrunner, launched this on the back of the massive
interest it had encountered in the IADB deal. With a 0.875% coupon
and a spread of 6.5bp through JGB and 8.5bp through the credit
curve, this deal was criticized for its aggressive pricing. It was
aimed exclusively at European accounts and the spread widened
slightly after launch. Morgan Stanley placed paper mainly with UK,
German and Italian fund managers, but most suspected that it was
left with paper on its books.
Although not the most successful Euroyen deal, the EIB issue
opened up the market for non-10-year paper. It took advantage of a
gap in the market, and "reflected how tight Euroyen had got to
JGBs, a reaction to international demand for yen and the strength
of the currency", says Kelleher at Tokyo Mitsubishi. The
introduction of shorter-dated paper was important for the
development of a Euroyen yield curve.
However many investors chose to hang on for the second KfW
yen deal, launched on November 1, raising ¥100 billion of five-year
bonds with a 1% coupon and a spread of 2bp over JGBs. Nomura and
Deutsche Bank acted as bookrunners. This deal was bigger,
higher-yielding and had a global structure that increased
liquidity. KfW's first global issue in a currency other than the
euro, it was a blowout thanks to its relatively generous coupon.
These supranational deals from traditional Euroyen issuers
were basically JGB surrogates sold to international investors, and
were very similar to the character of the Euroyen market in the
mid-1990s. But by November Euroyen issuance was going from strength
to strength and a market for corporate paper began to develop.
The start of corporate Euroyen issuance was driven by the
same factors that were fuelling corporate issuance in Europe and
the US. "The corporate sector has been the vogue this year, the
whole Euromarket has been about picking up extra yield," says
McGregor at Merrill Lynch. Fund managers have been under
unprecedented pressure to produce greater returns for their
investors. "Yen investors have taken a far broader look at their
portfolios to incorporate this need for credit," says Andrew
Asbury, head of the fixed-income syndicate at Nomura.
Several corporates had already come to the market with MTN
private placements, and Nomura had launched a ¥50 billion deal for
DSL Bank of Germany, described by Asbury at Nomura as "the first
dip in the water" of a corporate yen market. "We were trying to
change the whole focus of the yen market," says Asbury, away from
supranational and sovereigns and towards credit. Nomura, along with
Merrill Lynch as bookrunners, pushed this development further on
November 9 with a ¥50 billion deal for Toyota Motor Credit Corp -
the first corporate bond issue in the global yen market. A
five-year deal, it carried a 1% coupon and a spread of 18bp over
JGBs.
"TMCC was the ideal candidate to open the fixed-rate global
corporate yen market," says McGregor at Merrill Lynch. TMCC had not
tapped the Euroyen market for years, but was a well-known name to
domestic and international yen investors thanks to its Japanese
parent company, Toyota. The reputation of its parent company
enabled the deal to price tighter than most corporate issues at
only 18bp over JGBs, and this has tightened since the launch.
The TMCC deal was deliberately marketed at international
investors, which bought 80% of the paper, to preserve domestic
demand for Toyota paper and ensure liquidity through a wide
distribution. Investors were attracted to the deal primarily as a
way of buying currency exposure, with some extra yield for the
credit risk, and the spread was not generous enough to attract many
Japanese buyers. TMCC took advantage of tightening swap rates to
convert the proceeds to dollars.
Encouraged by TMCC's success in the Euroyen market, car
companies further down the credit curve started to prepare deals of
their own. A few days later single-A rated General Motors, which
had yen funding requirements, issued its debut in the Euroyen
market, a five-year ¥50 billion deal at a more generous spread than
TMCC - 36bp over JGBs. Merrill Lynch and Bear Stearns led the deal.
Three-quarters of the paper was bought by domestic investors
looking to pick up extra yield through credit exposure. "General
Motors paid noticeably more spread than TMCC, and the demand from
Japanese investors grows exponentially the bigger the spread over
JGBs," says Paice at Salomon Smith Barney.
Ford Motor Credit was the next corporate to take advantage of
investors' thirst for yen, reassured of the appetite for single-A
corporate paper in the yen market by General Motors' success. On
November 8, it issued a ¥30 billion four-year deal, with a 1%
coupon and a spread of 28bp over JGBs, led by Salomon Smith Barney.
The shorter maturity was intended to reassure investors that might
be nervous about long-term prospects for yen interest rates but
wanted the currency exposure. The bonds sold well to Japanese
accounts, but slowly to European investors.
The final deal in this run of Euroyen issuance came from yet
another car maker, BMW, the fourth in a month to access the Euroyen
market. It was a ¥40 billion three-year issue with a 0.70% coupon
and a spread of 25bp over JGBs, with Barclays Capital and JP Morgan
as bookrunners. This paper was mainly sold into Japan and had
limited success because of its relatively tight pricing.
The financial community has been impressed at the speed with
which a credit curve in yen is being built. "Before this recent
flurry, there hadn't been Euroyen corporate deals since the 1980s.
It is the reopening of the market," says Paice at Salomon Smith
Barney. There are substantial worries about the liquidity of some
deals, especially those sold mainly to Japanese investors, who tend
to buy and hold. In the case of the General Motors this arguably
did affect liquidity, "but ultimately liquidity has been patchy in
some of the internationally sold issues as well," says Paice. "The
more issues there are, the more international investors will feel
relaxed about liquidity".
The corporate market can support smaller deals, and an issue
of ¥30 billion is not necessarily too small to be liquid, but
sovereign and supranational deals need to be at least ¥50 billion.
This year the market may grow further. "The trend will be towards
slightly bigger transactions over time," says Rooney.
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Bookrunners of Euro and global yen bonds Jan-December 8,
1999
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Rank
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Manager of Group
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Amt ¥ bn
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Iss.
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% share
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1
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Nomura Securities
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636.3
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33
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26.68
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2
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Merrill Lynch & Co
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327.2
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36
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13.72
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3
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Morgan Stanley Dean Witter
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324.05
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32
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13.59
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4
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Bank of Tokyo-Mitsubishi Ltd
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200
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9
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8.39
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5
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Daiwa Securities Group Inc
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164.73
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49
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6.91
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6
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Salomon Smith Barney
International
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137.12
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8
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5.75
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7
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Deutsche Bank
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97
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5
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4.07
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8
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Dresdner Kleinwort Benson
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64.5
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8
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2.7
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9
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Dai-ichi Kangyo Bank Ltd
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63.4
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11
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2.66
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10
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Warburg Dillon Read
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60.68
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15
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2.54
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Total of Issues used in the table
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2384.6
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229
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100
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Source: Datastream
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