Emerging market sovereigns expecting easier access to Japan’s debt capital markets following Mexico’s return will need to spend time and effort explain their credit the investor base if they want to be successful.
Mexico made its first unguaranteed appearance in the Samurai market since 2000 on May 31. The two tranche deal comprised a JPY50 billion three-year bond paying 1.29% and a JPY30 billion five-year trade paying 1.56%. Joint bookrunners comprised Citi, Morgan Stanley, Nomura and Sumitomo Mitsui Financial Group.
As well as marking a successful return to the Japanese capital markets for the sovereign, the bond is also the first sovereign Samurai issue to carry a rating lower than single ‘A’, according to Dealogic data. Mexico is rated ‘Baa1’ by Moody’s and ‘BBB’ by both Standard & Poor’s and Fitch.
Japanese investors are known for preferring higher rated credits but Mexico has spent a number of years re-establishing its name in Japan following its long absence. It was last active in the Samurai market in 2010, issuing a JPY150 billion 10-year deal and also in 2009 in another JPY150 billion10-year trade.
The latter two deals were both guaranteed by the Japan Bank for International Cooperation (JBIC), a government-run body which ensures 95% of bondholders’ principal and interest in the event that the sovereign issuer defaults, minimising issuers’ direct risk and making it easier for lower rated borrowers to access the market.
“There have been a number of phases to get Mexico to this point. The first was getting added to the a benchmark government bond index in Japan which mean it has a reasonably large following among Japanese investors; phase two was working with JBIC to issue the two deals in 2009 and 2010,” said a banker close to the deal.
Although pricing guidance was not releases publically, it is understood the borrower managed to price at the tighter end and secure a deal size that was bigger than originally anticipated.
“Pricing is going towards the tighter end,” said the banker close to the deal the night before pricing. “Demand is driving many discussions that this late in the process you do not normally see.”
“The success of the transaction was the amount of effort that they [Mexico] in and the degree to which the Japanese investor base has understood the Mexico story,” he added.
Although investor understanding of the credit was key to the bond’s appeal, the Samurai also offered a spread that was attractive both to yen and relative value investors.
The yield is higher than comparable ‘BBB’-rated Japanese credits such as Toshiba Corp. It is also offering a wider spread than Mexico’s comparable US dollar bonds.
“Mexico attracted a fair number of relative value buyers (institutional investors who are buying both JPY and USD bonds) because the spread Mexico is paying seems roughly 20bp-30bp wider compare to its dollar-denominated bond with a similar maturity in a secondary market. So big investors jumped in even though the name is not that great,” said Kyoko Kaji, credit analyst at Nomura Securities.
However pricing was not the primary driver for the transaction from the borrower’s standpoint. Rather it wanted to regain access to one of the biggest debt capital markets in the world and diversify its investor base.
“It seemed that Mexico really wanted to issue yen-denominated bond now, in order to diversify their funding base even at the cost of paying more,” said a banker away from the deal.
Mexico’s experience could act as a blue print for other lower-rated sovereigns who want to want to access Japan’s capital markets.
“It is fair to assume that Japanese investors would be receptive to other ‘BBB’-rated sovereigns but others borrowers should not expect to just ride on Mexico’s coattails, they have to do a lot of work on the ground,” said the banker close to the deal when asked if he was talking to any other prospective sovereigns.
Latin America names are thought to be natural candidates as many have previously accessed the Samurai market with JBIC guarantees and would benefit from the Mexico story.
In January 2011, Panama - rated ‘BBB-’ by Fitch and S&P and ‘Baa3’ by Moody’s - issued a JPY41.5 billion 10-year deal paying 1.5% . In May the same year Uruguay supplied a JPY40 billion 10-year bond paying 1.64%. The country is rated ‘BB+’ by Fitch and S&P and ‘Ba1’ by Moody’s. Colombia also came with a bond in 2009 - aJPY45 billion 10-year issue paying 2.42%. The borrower carries a rating of ‘BBB-’ (Fitch and S&P) and Baa3 (Moody’s).
Latin American Sovereign Samurai 2008 to 2012 YTD