Debt capital markets: Poland taps Japanese demand for EM paper
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Debt capital markets: Poland taps Japanese demand for EM paper

Commitment key to success in samurai; More Latin American issuance likely

Poland attracted strong demand for its latest yen-denominated bond early last month in the latest demonstration of Japanese investors’ increasing appetite for emerging market debt.

The single-A-rated sovereign raised more than double its initial target of ¥30 billion, selling ¥56 billion ($680.7 million) of five-year paper at a tight 67 basis points over yen mid-swaps and an additional ¥10 billion 15-year tranche to a single investor.

The deal was Poland’s second outing in the samurai market in a year that has also seen ground-breaking issues in yen by Latin American borrowers Mexico and Banco do Brasil.

The Mexican sovereign drew more than ¥100 billion of orders for its first public samurai note – a ¥80 billion dual-tranche three- and five-year issue – at the end of May, while Brazil’s state-owned lender returned to the Japanese market in September for the first time in nearly two decades with a tightly priced ¥24.7 billion Euroyen transaction. Bankers said the warm reception accorded to all three deals spoke not only to Japanese investors’ readiness to look further afield for yield but also a desire to diversify away from their traditional focus on western European, and particularly financial, names.

"The eurozone crisis has made them very cautious about those credits, so they’re more willing to look elsewhere for alternatives," says Takaomi Tahara, head of international debt syndicate at Nomura Securities.

Diversification is a key aspect of the Japanese market’s appeal for borrowers as well, and one that has come into increasing prominence since the global financial crisis. "We are always trying to diversify our sources of funding, and the size of the investor base and depth of demand make Japan a very attractive market," says Daniel Alves Maria, executive manager of financial direction at Banco do Brasil.

Anna Suszynska, deputy director of the public debt department at the Polish ministry of finance
Anna Suszynska, deputy director of the public debt department at the Polish ministry of finance

Issuing in yen can also help EM borrowers attract Japanese investors into their domestic markets, according to Anna Suszynska, deputy director of the public debt department at the Polish ministry of finance. "The samurai market not only offers access to a discrete, predominantly buy-and-hold investor base but also the opportunity to support a growing interest among Japanese buyers in our domestic, zloty-denominated bonds," she says.

Nevertheless, she notes, the barriers to entry remain high. "Issuing in samurai is a lengthy and relatively complex process, and means committing to a long-term relationship with the investor base, which is why some EM names may be less willing to explore the Japanese market."

Japanese buyers have also retained their preference for high-grade credits, despite the global low-yield environment, according to Tahara. "This is still a very conservative investor base and any EM issuer would have to be investment grade, and preferably single-A rated," he says.

Poland’s popularity among Japanese investors is based both on its rating and a history of yen issuance back to 2003, while triple-B rated Banco do Brasil was only able to come to market without even domestic samurai documentation thanks to a 40-year history of involvement in Japan.

EM credits keen to tap the yen market can, however, opt to issue initially with a guarantee from the Japan Bank for International Cooperation (JBIC) – the alternative chosen by Mexico, which sold guaranteed notes in 2009 and 2010 before testing the public market this year.

"Issuing with a JBIC guarantee is a good way for a new borrower to promote the underlying credit and makes the first step into the Japanese market that much easier," says Tahara.

Other recent borrowers in the JBIC-guaranteed format include a trio of EM sovereign names on the cusp of achieving full investment-grade status – Uruguay, Turkey and most recently Indonesia – all of which have been touted as potential candidates for standalone samurai deals.

Guaranteed way back

In addition, a JBIC guarantee – reported to cost issuers 50bp to 70bp – can provide a way back into the Japanese market for credits on a downward ratings trajectory. Central Bank of Tunisia, once a regular issuer of standalone samurai but now on the verge of losing its remaining two investment-grade ratings, mandated bookrunners for a guaranteed deal last month.

Poland’s success in yen is also reported to have sparked interest in the market from other central European sovereigns, including single-A-rated Slovakia and Slovenia – although the latter’s membership of the eurozone might be a stumbling block for Japanese investors wary of further fallout from the crisis.

Suszynska reports that even Poland, with its well-established track record in yen, has had to work hard to convince Japanese investors that the economy has not been affected by contagion from its western neighbours. "They still have concerns about the eurozone crisis but they can see that the situation in Poland is stable over the past two years," she says.

No such reservations apply to Latin America, however, which is where most bankers expect the next wave of EM yen issuance to come from.

"Japanese demand for issuers out of Latin America, particularly Brazil, has grown considerably over the past two years," says Carlos Vargas, head of EM at Mizuho Securities. "And Latin American issuers are looking at the Japanese market and thinking it’s just too deep and relatively untapped not to make an effort."

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