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Thursday, 21 February 2019

Risk and reward

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The Samurai market is broadening as a result of the search for yield in a negative rates environment, testing Japanese investors’ tolerance for risk.

Demand for higher returns has been the one and only theme this year in the Samurai bond market, as the Bank of Japan’s introduction of negative interest rates forced investors out of their comfort zone. This has created openings for a wider-than-usual set of issuers and investors and should help the international yen marketplace grow for years to come.

The arrival of negative rates in early February squeezed returns on the Samurai market’s traditional go-to credits, to the point that top-rated global issuers would need to issue well inside yen swaps just to match their cost of funding in euros or dollars.

Issuance froze as a result, and the pipeline that has built up since the new financial year started on April 1 has looked very different. Single A rated Societe Generale got the ball rolling in late May with senior and Tier 2 bonds, with the latter rated BBB–/A– (S&P/Fitch). The senior portion provided relative value versus Double A peers, while the subordinated notes offered generous returns in exchange for higher risk. The deal offered a welcome alternative to negative-yielding Japanese government bonds.

“The big theme this year is the increase in risk appetite because of the Bank of Japan. Brexit has also hampered issuance for some European banks, but the need for a home for funds overrides those concerns.”

The hunt for higher returns continued with the next transactions. Mexico was able to sell its biggest standalone Samurai, leveraging an attractive coupon and investors’ familiarity with the name to raise a whopping ¥135bn (US$1.26bn) across four tranches. Meanwhile state-run oil company Petroleos Mexicanos, rated Baa3/BBB+/BBB+, saw a 10-year deal twice oversubscribed as investors chased a juicy 0.54% coupon with the additional benefit of a guarantee from the Japan Bank for International Cooperation.

Issuers have also been able to stretch tenors beyond the five-year benchmark and into seven, 10 non-call five and 10-year maturities.

The changes in the Samurai market reflect the broader need in Japan to boost returns after decades of deflation. Corporations were spotted moving heavy cash piles into SocGen’s 10-year bullet and 10 non-call five tranches, while regional banks that have become more desperate than central Samurai investors (due to their relatively less-diverse holdings of foreign assets) bought about half of Pemex’s 10-year Samurai. Even more eyebrow-raising was the decision by Singapore sovereign wealth fund GIC to buy into Indonesia’s first fully non-guaranteed yen bonds in years.

“The big theme this year is the increase in risk appetite because of the Bank of Japan,” said a London-based Samurai banker. “Brexit has also hampered issuance for some European banks, but the need for a home for funds overrides those concerns.”

Looking ahead to September, the banker said the list of prospective deals included some promising surprises, such as central European sovereigns looking at Samurai funding. Sources said Romania (Baa3/BBB–/BBB–) concluded a roadshow in Tokyo a few weeks ago in the hopes of bringing Japanese investors further down the credit curve of international issuers.

Debut yen issuers are also eyeing Pro-bonds as an easy way to use their existing MTN programmes to access the immense liquidity in Japan, home to some of the world’s largest pension funds and asset managers.

“Issuers are learning the benefits of showing commitment to Japanese investors after seeing how Japan can be relatively stable in the face of global volatility,” said another banker involved in Samurai bonds. “They see Japan as an important market alongside China.”

Still, the road to issuer diversification will be a long one. Although the Japanese have come a long way in accepting more risks, such as Basel III-compliant Tier 2 bonds, the expansion into lower-rated Samurai deals from foreign issuers will not be easy. The pipeline could peter out after well-known Single A banks hit the yen markets with senior and subordinated deals.

“Some investors said they couldn’t think of what Romania was known for. It might take more than a few roadshows before we actually see a deal happen,” said one of the sources.

Attempts by Chinese issuers to resume issuance in Japan following a 16-year hiatus could also take years, given the geopolitical tensions between the two countries and investor concerns over China’s mounting debt and weakening bank margins. Industrial and Commercial Bank of China’s Pro-bond in June, the first from China in such a format, was said to have been supported by Chinese money.

Citic Group is planning a Samurai offering that would be the first from the country since 2000, although some Japanese market participants are sceptical about the extent of local demand.

For now, the pipeline is clustered around familiar Single A and Triple B rated financial institutions who are looking at senior or Tier 2 bond issuance.

HSBC and Standard Chartered are expected to take another crack at issuing Samurai. Double A rated Australia and New Zealand Banking Corp is also said to be eyeing a yen transaction, but the format is yet to be revealed.

There is even talk that an Additional Tier 1 Samurai could rear its head sometime soon, even though Japanese buyers are said to be well aware of the impact of the uncertainty around Deutsche Bank’s ability to meet AT1 coupon payments, which wreaked havoc on financial markets in February.

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