Latin America samurai bonds set for comeback
New sovereign issuance hope; Pemex investor day piques interest.
A new wave of Japanese samurai bond issuance could be on the way from Latin America, thanks to a combination of possible US interest rate hikes and a growing need among Japanese investors to diversify their portfolios.
Latin American borrowers used to be frequent users of the samurai market in late 1990s, so simply
they are coming back to the market
The samurai market has been a popular destination for Latin American issuers in the past, but there has been only a modest stream of deals since the onset of the global financial crisis, mostly from sovereigns. However, this could be about to change as the economic conditions for Japanese investors and Latin American borrowers become conducive to new deals.
“Latin American borrowers are keen to come over here,” says Masaya Mizobuchi, head of the global capital markets promotion department at Mizuho Securities. “I would hope that Latin America could become potentially approximately 20% of the samurai market.”
Way to go
It has a considerable way to go before hitting that figure. The samurai market generated a total of $24.6 billion in deal proceeds in 2014, of which only $591 million (2.4%) came from Latin America via one deal. In 2013, the region provided 4.8% of the market, with one $821 million trade out of a total of around $17 billion.
The most recent samurai from Latin America was Mexico’s $591 million issue in July last year, which was arranged by Citi, Mizuho and Nomura. It was the sovereign’s third deal following a $821 million trade in July 2013 and $1 billion in 2012. Bankers now feel that appetite is there for deals from Latin American financial issuers, and perhaps corporates too.
“I believe that the IADB general meeting in Busan will help the momentum of Japanese investors thinking about LatAm credit, both in the sovereign and financial institution space,” said Naoyuki Takashina, joint head of international DCM at Nomura, ahead of the meeting.
Among corporates, Mexican oil company, Pemex, held an investor day in Tokyo last November amid rumours that it could be considering a non-JBIC guaranteed samurai. Mizuho, Sumitomo Bank, Bank of Tokyo Mitsubishi and Nomura organized the roadshow. If Pemex did press ahead with a deal it would be only the second Latin American corporate to do so after the region’s largest wireless carrier América Móvil. The Mexican firm issued $156 million equivalent in the samurai market in October 2011 in a deal that was expected to spur further corporate issuance from the region. However, it remains the only such issuer so far.
“Latin American borrowers used to be frequent users of the samurai market back in late 1990s, so simply they are coming back to the market,” says Shohei Takahashi, joint head of international DCM at Nomura. “It is also possibly connected to the rate hike in the US, which will have some impact on their funding costs. Japanese rates on the other hand are expected to stay fairly stable, so would provide a good opportunity for issuers.”
Any sovereign or financial institution in Latin America could be a candidate to issue a samurai, he says. “It may be a bit premature for corporates from Latin America to issue samurai bonds due to their [lack of] name recognition in Japan,” he concedes.
Reiko Hayashi, managing director and head of Japan global capital markets at Bank of America Merrill Lynch, says: “Since the financial crisis, risk appetite from Japanese investors has become stronger and we have seen several LatAm issuers tap the Japanese market.”
Hayashi also expects an increase in samurai issuance from Latin America, but she highlights the potential restraints on a market that has burnt some investors in the past.
“I expect to see issuance from Latin America increase gradually. In the past, Japanese investors had a hard time over Argentina, so it really depends on the name and credit rating,” Hayashi says. “Would it happen for lower-rated countries? I’m not so sure.”
While LatAm is expected to become an increasingly prominent issuer of samurai bonds, European entities dominated the market in 2014 with a 68.2% share of bond volume, up from 57.6% in 2013. Australasia took second place in the table and North America was third.
“Now, with Japanese investors struggling to make a good return on investment, they are trying to diversify, and some of the Latin American countries have good enough credit ratings for them,” says Kaneyoshi Muramatsu, director, global capital markets promotion department at Mizuho Securities.
However, the stronger-rated LatAm sovereigns have good market access elsewhere: triple-B rated Panama sold a $1.25 billion 2025 bond with a 3.75% coupon in early March at 178bp over treasuries, a deal that attracted $6 billion in orders. But the samurai market could offer diversity.
“I am talking about countries like Mexico or Chile,” Muramatsu says. “There’s a good success story behind that over the past few years, and that has paved the way for Latin American issuers.”