Yen bonds: Search for liquidity heads to Japan


Jethro Wookey
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The rapid expansion of samurai bonds (yen-denominated deals sold by foreign borrowers into Japan) puts them firmly in the coveted list of credit-crunch beneficiaries. Borrowers of all types facing the increasingly expensive prospect of issuing in their illiquid domestic markets are finding an attractively cheap alternative in Tokyo. The bonds are also attractive for individual investors in Japan, offering higher yields than domestic bonds or the interest paid on savings accounts.

"We see this market as being radically, dramatically different," says Brian Lawson, head of syndicate at Nomura. "In the post-crisis period, Japan has clearly suffered far less in terms of an impact on its financial system than other markets."

Traditionally, international issuers have been deterred from the Japanese market by the heavy documentation and disclosure requirements. Until last summer, the market was a niche for US bank holding groups and the odd corporate, such as Ford, which last appeared in 2005. But comparatively favourable conditions in the samurai market mean that more borrowers are now willing to put the work in. It took until only mid-August this year for samurai volumes to surpass those for the whole of 2007 (which totalled ¥2.2 trillion), and Merrill Lynch predicts that total samurai issuance for the year will reach ¥3 trillion ($30 billion) for the first time since 1996. Moreover, the volumes of individual deals are increasing, with about half of samurai deals above the ¥80 billion mark, compared with just 12.5% last year. Although the US is usually the source for more than 70% of samurai issuance, this year it is responsible for just a quarter. Roughly 30% has come from Europe, and 25% from Australia.

But the ebullience surrounding the new status of samurais among international borrowers could be declining, as issuers realize that there are limitations as to who can enjoy success. Sentiment among samurai investors is mixed, with many worried about rising spreads in international markets, according to Lawson. But this is not as much of a concern for the bigger international banks. UBS and RBS both paid up more than other large banks for their own samurais (UBS paid a coupon of 2.82% for its ¥47 billion issue in June, and RBS paid 2.59% on its ¥141 billion deal in the same month), but the perception among investors is that these institutions are too big to fail. The same can be said about the so-called Australian big four: National Australia Bank, Commonwealth Bank, Westpac and ANZ. All are rated double-A. Smaller, lower-rated institutions do not enjoy the same investor confidence.

Samurai supply is up since the crunch

Issuance volume by month

Source: Dealogic

Suncorp, a single-A rated Australian bank, was forced to withdraw plans for a samurai worth $200 million, after a rise in pricing costs and concern among investors. The samurai market has historically been open to lower-rated issuers that could pay up for issuance, this year it is more the playground of the top credits, such as triple-A-rated Rabobank, which sold the largest samurai since before last summer in June. In 2006, about 20% of samurai issuance was rated double-A or triple-A. This year, the figure is about 60%. "Some [lower-rated] issuers might be able to access the market but if they benchmark their ambitions to the likes of Rabobank, they will be disappointed," says Sam Amalou, head of debt capital markets at Daiwa Securities. "As long as there are double-A and triple-A financials coming in, it will be very difficult to attract investors to lower-rated deals in similar volumes."

Lasting effect?

There are signs that the samurai market is being treated more as a long-term play than a short-term, opportunistic one. "The golden rule of banking is that things happen in cycles, so Japan could well become less competitive again in the future," says Lawson. "But once an institution bothers to put the documentation in place, it is much easier to come back to this market, as investors become more familiar with that name."

Double-A-rated Taqa, the national energy company of Abu Dhabi, has recently established a $3.5 billion credit facility in Japan, and is seeking a credit rating to sell samurai bonds. As there are hardly any financial problems in Abu Dhabi compared with western markets, this can be seen as a diversification move to broaden Taqa’a investor base. Amalou, who has worked on samurai deals from such banks as ANZ and RBS, as well as public issues from Thailand and Poland, confirms that most issuers intend to establish themselves as regular borrowers. "Ultimately, it has to make economic sense, and if the situation in other markets improves, some issuers may be less keen on Japan," he says. "But a number of issuers we speak to are showing a genuine interest in accessing this market, and are putting the effort in to develop it."