Friday, 19 July 2019

Sleeping Samurais

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  • Foreign exchange dealers rest under an electronic board displaying the Japanese yen’s exchange rate against the U.S. dollar at a trading room in Tokyo.

Few Asian borrowers have been able to take advantage of cheap yen funding following Japan’s move into negative interest rates last year, but the market is opening up as Japanese institutions look for ways to boost their returns.

Japan’s capital markets have played an important role in Asian development ever since the ADB sold the world’s first Samurai bond in yen in 1970. Almost 50 years on, institutional investors in Tokyo and beyond are hungrier than ever for exposure to the growing region to make up for weak returns at home, but last year’s move into negative interest rates has clouded the picture.

Borrowing at below 0% a year ought to appeal to much of developing Asia – not even a multilateral development bank can offer those kinds of terms. Currency swaps, however, remain expensive for borrowers with no natural need for yen, and Japanese investors are still reluctant to venture too far down the credit curve.

Just as Bank of Japan Governor Haruhiko Kuroda, the former ADB president, is finding a 2% inflation target further away than expected, capital markets bankers are still waiting for Japanese capital outflows to hit the rest of Asia.

International issuers sold ¥1.257trn (US$11.5bn) of yen bonds in Japan’s Samurai market in 2016, well below the ¥2.14trn annual average between 2010 and 2015, according to Thomson Reuters data.

“The yen market environment is relatively stable compared to dollar and euro, and in that sense I think issuers in Asia and other emerging economies want to get a foothold in the Japanese market to diversify (funding sources).”

Yen issuance from Asia dropped sharply in 2016, falling to ¥215bn from an average of ¥575bn over the previous five years.

Rather than igniting the market, the BOJ’s introduction of negative interest rates in January 2016 proved the biggest hurdle. Yen swap rates – the traditional Samurai benchmark – plunged into negative territory in the short to mid-term sector, rendering spread pricing impractical. The BOJ’s policy move also caused the already-wide USD/JPY currency basis swap to widen even further, adding to the cost of borrowing in yen and converting the proceeds to US dollars. Many regular borrowers, including Double A rated names in Australia and Scandinavia, skipped yen issuance last year altogether.

Amid the turmoil, there were some encouraging signs. The unprecedented drop in yen yields has forced Japanese investors to change their traditionally conservative investing style. Where the Samurai market used to be limited to bonds of five years or shorter with ratings of Single A or higher, investors last year ventured out to longer tenors of seven years to 10 years and Triple B credits.

Mexico’s ¥135bn Samurai last June was an example of growing demand for lower-rated overseas credits even at 10 and 20 years.

“There were many investors participating with the sizeable ¥135bn deal well oversubscribed, and we felt a sense of ‘awakening’ and a change of landscape in the market”, said Noriaki Nomura, debt capital market managing director at Mitsubishi UFJ Morgan Stanley.

Electricite de France in early 2017 was another example of investors going further out the curve, with a ¥137bn Samurai in tranches of 10 to 20 years.

“The BoJ’s monetary policy has actually given a fresh impetus for Japan’s capital market to analyse a variety of credits,” said Mitsubishi’s Nomura.

Chinese comeback

Perhaps the biggest sign of that changing mindset came in 2016 with the first yen bond from a Chinese issuer in 16 years.

Industrial and Commercial Bank of China sold ¥15bn of three-year notes in June in the Pro-bond market, where companies can use international documentation but are restricted to targeting only professional investors. Citic Group followed in October, returning to the Samurai market for the first time in 20 years with a ¥100bn four-part offering.

Elsewhere in Asia, South Korea’s Hanwha Chemical sold a ¥20bn three-year Samurai, and Indian lender ICICI Bank sold ¥10bn of five-year Pro-bonds.

Indonesia also found investors for ¥100bn of three and five year Samurai bonds without the need for a guarantee from the Japan Bank for International Cooperation (JBIC), underlining the growth in Japanese appetite for a crossover credit that is yet to win an investment-grade rating from S&P.

Indonesia has been regularly accessing the Samurai market, initially with JBIC guarantees under the GATE (Guarantee and Acquisition toward Tokyo market Enhancement) programme, designed to encourage conservative Japanese buyers to consider new markets.

“Indonesia is a beautiful example,” said Kaneyoshi Muramatsu, head of international yen syndicate at Mizuho. “They did JBIC-guaranteed deals a few times, then did a mix of JBIC-guaranteed and non-guaranteed bonds, and the last one was without guarantees at all, completing their ‘graduation’ from the JBIC guarantee facility.”

After a strong response to new Asian names in 2016, more Asian borrowers are expected in 2017.

“The yen market environment is relatively stable compared to dollar and euro, and in that sense I think issuers in Asia and other emerging economies want to get a foothold in the Japanese market to diversify (funding sources),” said Mizuho’s Muramatsu.

“We may have more from China as the foundation of expansion is already in place after ICBC and Citic did yen deals.”

Major Chinese banks are expected to access the yen market this year as they continue to ramp up their international funding.

“They are borrowing in overwhelmingly big size in dollar, so we think they will look strongly at the yen market in terms of diversification” said Yoshihiro Inoue, executive director of international debt origination at Daiwa.

Inoue picks India as a possible borrower, building on ICICI’s debut in the Pro-bond market last year.

“Although funding demand in Asian countries excluding China is a lot smaller, India, especially Indian financial institutions, would be the next to access the yen market”, he said.

Asia over Europe

Bankers said Japanese investors do want to buy Asian credits to diversify their portfolios.

“Supply has come mainly from Europe over the past few years, investors actually want credits of different and new (regions), the US and Asia in particular,” said Akihiro Igarashi, syndicate department executive director at Nomura.

Lingering uncertainty around growth in the European Union, with potentially destabilising elections and another Greek debt restructuring still in the headlines, is also driving some Japanese investors away from European credit.

“This year we have risk events, especially political ones in Europe, so some investors feel stability more in Asia,” said Hiroyuki Kinoshita, global fixed income capital markets head at SMBC Nikko.

Mizuho’s Muramatsu agrees.

“Japanese investors have an affinity with Asia,” he said. “Although Japanese investors are still cautious about investing in lower rated credits, the market will expand if the JBIC provides guarantees and make bonds easier for Japanese investors to buy”.

Bankers said Thailand’s Triple B ratings would attract good demand from Japanese investors, but they do not expect issuance in the near future.

“Japanese firms have expanded business to Thailand and thus Thailand is a familiar existence to Japanese more than Thailand’s credit ratings suggest”, said Daiwa’s Inoue. However, as the local Thai market has grown, Thai borrowers see no need to issue in foreign currencies. Indeed, the Samurai market has seen no Thai sovereign issuance since Kingdom of Thailand offered ¥55bn of three-part bonds in 2008 and there has been no corporate issuance since PTT did ¥36bn of 10-year notes in 2007.

The Philippines did its first private-placement Samurai in 2010 with ¥100bn in 10-year bonds guaranteed by JBIC. The issuer was in discussion with JBIC in 2011 for issuance of 15 to 20-year bonds, but due to the devastating earthquake in Japan which temporarily curtailed new issuance, it issued in dollar instead.

Malayan Banking was a Malaysian name that tapped the yen market in the past, but has not since April 2015 when it sold ¥31.3bn of dual-tranche Samurai bonds.

Bankers, however, doubt an issuance increase from Asia in 2017 will be substantial.

The one and biggest reason is that Asian issuers can raise funds at more competitive levels in dollar than in yen, and even from their local bond markets as well.

“Thai, Malaysia and Philippines have seen their domestic bond markets growing”, said Daiwa’s Inoue. “As the proceeds are used in their own currencies, they raise funds in their own currencies first, and funding in dollar comes next and then yen, so we don’t expect a tremendous increase from Asia.”

Basis swaps improved towards the end of March, but pushed wider again in April. Nonetheless, USD/JPY currency basis have improved to levels not seen since August 2015, which may nudge more Asian borrowers to issue in yen. Bankers said there would be more issuance if basis swaps further improve, primarily from South Korea.

Growing the market

A group of big deals in early 2017 have rekindled expectations of a good year for international borrowers in yen.

The BOJ’s shift to yield curve control in September, to prevent an excessive flattening of long-term rates, has spurred a modest recovery in yields and lifted demand for long-dated notes from the likes of Australia and New Zealand Bank and National Australia Bank, which both sold Samurai bonds in January.

European banks have enjoyed a strong response to a new class of senior non-preferred notes, again highlighting a desire and ability among Japanese institutions to study new credits in return for higher yields.

The euroyen and Global formats have also proved no hurdle for Japanese investors where the issuer is already well-known. Starbucks sold global yen bonds exclusively to Japanese buyers in March, joining the likes of Apple and Procter & Gamble that have used the international format to target Japanese institutions.

“The investor base is larger in Samurai, but Japanese investors have got used to euroyen and global yen, so the latter will likely grow”, said Mitsubishi’s Nomura.

The growing Pro-bond market, an initiative backed by the Development Bank of Japan, also offers lower documentation and issuance costs compared to the Samurai format, where filings must be made in Japanese. That option may appeal to overseas borrowers, especially those looking for relatively small sizes.

“To access the Samurai market, there is a hurdle that is a mandatory continuous disclosure, but borrowers that do not want to go that far do have an alternative such as pro-bonds or euroyen bonds,” said Kenichiro Kurataki, debt syndication assistant manager at Daiwa.

Asian issuers looking to take advantage of the BOJ’s negative interest rate policy, however, may need to do so quickly. BOJ Governor Kuroda’s term ends in April 2018, and speculation over his replacement and whether the BoJ will change its current policy framework is likely to add to volatility in the second half of 2017 – especially as the US extends its tightening cycle and the European Central Bank looks for ways to scale back its stimulus.

While Kuroda’s monetary easing remains firmly in place, Asian issuers have an opportunity to deepen their long relationship with Japan’s capital markets. Japanese institutions are hungry for long-term income, and are growing more comfortable with Asian risk.

“Our role is to introduce various Asian names to Japanese investors so that the Asian bond markets can grow,” said Nikko’s Kinoshita.

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