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Thursday, 18 July 2019

Going pro

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There are signs of life in Japan’s fledgling debt market for professional investors, but it is still unclear if the Pro-Bond market will pose a challenge to the traditional Samurai.

A boy (L) plays a woman’s role, “Onnagata”, with other boys during their Kabuki performance on stage at Edo Tokyo Museum in Tokyo.

Going pro

Source: REUTERS/Kiyoshi Ota

A boy (L) plays a woman’s role, “Onnagata”, with other boys during their Kabuki performance on stage at Edo Tokyo Museum in Tokyo.

Pro-Bond market is gaining renewed attention from foreign issuers and investors as the government tries to promote the country’s capital markets as an attractive funding destination for Asian companies.

The six-year-old initiative has yet to rival the more popular Samurai bond market in size or investor interest, but Prime Minister Shinzo Abe’s reformist government has decided to do something about it.

Last December, the state-backed Development Bank of Japan announced it would buy ¥100bn (US$982m) of Pro-Bonds, securities that are targeted at Japan’s professional investors and are intended to offer an easier and quicker way for foreign companies to sell debt in Japan.

“The government’s support could become an incentive for issuers, especially for those who don’t want to commit fully to a Samurai programme,” said a banker involved in Pro-Bond transactions.

Unlike Samurai bonds, which require foreign borrowers to submit documents in Japanese, Pro-Bond issuers can use English, cutting the time it takes to put a deal together and lowering transaction costs.

The government also requires less documentation of Pro-Bond issuers. A firm that sells a Pro-Bond in Japan only needs to file an annual disclosure statement rather than the mandatory semi-annual statements required of Samurai issuers. Legal fees are also lower for Pro-Bond issues.

Despite these attractions, the flow of Pro-Bond offerings has been tepid at best, with only three issuers selling such paper totalling ¥284.9bn since 2011. ING Bank was the first to issue a Pro-Bond in two deals totalling ¥226.6bn. Banco Santander Chile and Malaysia’s Maybank are the only other issuers.

“The government’s support could become an incentive for issuers, especially for those who don’t want to commit fully to a Samurai programme.”

The Samurai market remains far larger, with deals surpassing the total size of the Pro-Bond market in the first month of this Japanese fiscal year alone.

The Japanese government is getting more involved because it wants to give greater number of investors the chance to invest in Asia’s growing economies.

The DBJ’s purchases, which are part of that initiative, have subsequently been credited with accelerating the pace of Pro-Bond issuance to its fastest level since the market’s inception. When Banco Santander Chile issued a ¥27.3bn (US$267m) three-tranche deal in mid-April, DBJ bought about a third of it, two bankers said.

DBJ also bought a Pro-Bond offering from Maybank, shortly after that from Banco Santander, according to bankers. The ¥31.3bn three-year deal was issued off the lender’s US$5bn multi-currency medium-term note programme.

First Gulf Bank also listed a Pro-Bond programme on the Tokyo Stock Exchange on June 10, prompting bankers to speculate that a deal would materialise soon.

Pro-Bond issuance could also become an alternative for companies either not well known to Japanese investors or rated lower than Triple B. Japan’s Samurai investors are widely characterised as cautious and are more interested in credits with ratings of Single A and higher, or those that have ties to Japan or strong credit fundamentals.

Euroyen competition

Yet bankers say the Pro-Bond market faces serious challenges. One of the main obstacles is the existence of a Euroyen market, which also allows foreign issuers to sell to yen investors using English documentation.

The Euroyen market is restricted to private placements and secondary trading is thin. While the Pro-Bond market aims to provide greater liquidity, however, the investor base is also small as it is restricted to institutional and qualified retail investors.

Pro-Bonds also are excluded from yen-denominated bond indices, such as the Nomura BPI Index. This discourages trust banks, pension funds and asset managers from buying them. Government officials say they have failed to encourage Pro-Bonds to be included in these benchmark indices.

Selling bonds to a smaller investor base has prompted some Latin American issuers, for example, to stick to the longer and more costly Samurai route instead, according to bankers.

Issuers also have been attracted to the competitive funding costs that Samurai borrowers have achieved in recent months.

The Bank of Japan’s monetary-easing policies and its purchase of Japanese Government bonds have pushed yields on scant domestic bonds to record lows, driving more of the country’s investors to buy relatively higher-yielding Samurai bonds instead.

The DBJ purchases in the Pro-Bond market are likely to continue to give the market room to grow, but the pace of development will be slow.

“I think it’s going to be hard for the Pro-Bond to catch up to Samurai, especially now that Samurais are really well bid right now,” said another Pro-Bond banker, adding, “but we’ll have to see how the DBJ’s support changes things.”

Nomura Europe Finance, ING Bank, ICICI Bank, Bank of America and the Asian Development Bank also have registered Pro-Bond programmes on the Tokyo Stock Exchange. ICICI had cancelled plans to issue one last year after trying to sell at a tighter level.

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