An area of the Samurai market in which bankers and investors would clearly like to see more issuance is the corporate sector. As with sovereign supply, issuance among corporates in the Samurai market dates back to 1979, with a debut transaction from Sears Overseas Finance. Among emerging market borrowers, meanwhile, Pemex issued the first triple-B rated Samurai transaction from the corporate sector in 1994, according to a report on the sector by the Bank of International Settlements.
In recent years, however, corporate activity in the Samurai sector has been modest, accounting for 11% of total new issuance in 2010 and for just 8% in 2011, according to data published by SMBC Nikko. This relatively low share, say bankers, probably reflects a shortage of supply more than lack of demand, especially for corporates rated single-A and above. "There would be very strong investor demand for issues from household names in the corporate sector," says Hisato Oiwa, managing director and head of capital markets at SMBC Nikko Securities in Tokyo. "Japanese institutions like to invest in companies with visible and understandable business models, whereas they are more suspicious of financial issuers with exposure to instruments such as CDS. So investors preference is for industrial issuers whereas supply is largely from financials."
That imbalance, say Tokyo-based bankers, is in part a consequence of the reporting requirements in the Samurai market, which are perceived by many borrowers to be prohibitively onerous for those coming to the market on a one-off basis. "Issuance in the Samurai market requires a heavy ongoing commitment from a cost and labour perspective, which is one reason why it has been more appealing to global banks with large funding requirements than corporates," says Kenji Setogawa, a director at Barclays Capital in Tokyo.
As in the financial sector, it is Korean borrowers that have done the most over the last 12-18 months to inject diversification and added yield into the market for corporate Samurai borrowers. Four Korean corporates accessed the market in 2011, with the three-tranche ¥6.6bn issue led by Mitsubishi UFJ Morgan Stanley Securities for Daejeon Riverside Expressway in November comfortably the highest yielding of the quartet. Guaranteed by the city of Daejeon (South Koreas fifth largest municipal), this was split into a ¥2.9bn one year tranche paying 200bp over swaps, a ¥3.3bn two year portion offering 210bp over, and a very small ¥400m piece at a 230bp pick-up.
Of the other Korean corporates issuing Samurai bonds in 2011, Korea Telecom raised ¥30bn in a single-tranche two year transaction in January, Korea Gas issued a ¥30bn five year deal in July, and Posco printed a two-tranche issue in October, raising ¥11.4bn of five year funding alongside a ¥30bn three year tranche.
Elsewhere in the corporate universe, European borrowers have been very elusive, with France by far the main source of corporate supply in the Samurai market. "French corporate borrowers have been looking at the Samurai market for many years," says Frank Toulouze of SMBC Nikko Capital Markets in London. "In 2008, when the dollar and euro markets were virtually shut for long periods, many corporates had a wake-up call about the need to diversify their funding bases. French companies, in particular, began to aggressively explore opportunities in new markets. So we saw companies such as Electricité de France (EDF), Gaz de France (GdF) and France Télécom coming to the market in 2010, and France Télécom came back again in 2011."
The ¥110.4bn EDF issue, led by Mitsubishi UFJ Securities in July 2009, was an especially important transaction as it was seen as re-opening the Samurai market for corporate borrowers after an extended barren spell following the Lehman bankruptcy. EDF was viewed as a suitable credit to offer the first corporate issue since Daimler Chrysler, given the French governments 84.8% stake in the utility.
Toulouze says that EDF, GdF and France Télécom all swapped the proceeds of their Samurai transactions into their home currencies, as do the vast majority of borrowers in the yen market. One French borrower that has issued in the Samurai market without swapping the proceeds into euros, however, is Renault. When the car manufacturer issued a ¥45bn Samurai via BNP Paribas and Mizuho Securities in December 2010, it was the first sub-investment grade borrower to access the market for almost a decade. In June 2009, Standard & Poors had downgraded Renault from BBB- to BB.
Bankers say that Renault is a special case, however, because of its 43.4% stake in Nissan, which is a source of comfort to Japanese investors, as is the companys A- rating from the local agency, JCR. "Although it is sub-investment grade, because of its stake in Nissan, Renault is seen by Japanese investors as a kind of hybrid French-Japanese issuer," says Toulouze. "Nissan is a popular credit in Japan, and was one of the first companies to re-open the domestic corporate bond market after last years earthquake. It targeted a size of about ¥30bn and ended up issuing a very tightly priced ¥70bn deal."
Toulouze adds that SMBC Nikko led a small repeat transaction for Renault, which was a ¥15.4bn two year issue at the end of 2011 priced at 300bp over swaps. "More than 30 accounts bought into the transaction in December, which was a good outcome given that markets were in very poor shape at the time," Toulouze says.
Another corporate borrower offering some welcome yield in 2011 was América Móvil, which issued an inaugural ¥12bn Samurai in October. Led by Mizuho and Mitsubishi UFJ Morgan Stanley, this broke new ground as the first issue in the market from an emerging market corporate outside Europe.
Among US corporates, meanwhile, Wal-Mart made its debut in the Samurai market in June 2008, shortly before the Lehman collapse. Its return to the market, with a ¥100bn five year transaction led by Mizuho Securities, BNP Paribas and Mitsubishi UFJ Securities, in July 2009, was viewed at the time as a potentially landmark transaction for the corporate sector, but since then US non-financial borrowers have been absent from the market.
US banks hold back
US financials, meanwhile, have been much less regular visitors to the Samurai sector than they were before the Lehman shock. In February 2011, JP Morgan launched the first Samurai bond by a US financial issuer since Citigroups ¥186.5bn transaction in June 2008. JP Morgans transaction, which was the second largest Samurai of the year, was split into a five year ¥76.9bn fixed rate tranche and ¥34.2bn floating rate portion with the same maturity. Described by one Tokyo-based banker as "clearly the premier US bank name", JP Morgan returned to the Samurai market early in 2012 with a two-tranche ¥161.5bn issue split into a ¥145.9bn fixed rate five year tranche and a ¥15.6bn five year floater.
Soon afterwards, Goldman Sachs launched a self-led ¥82bn Samurai, most of which came in the form of a five year ¥76bn tranche paying an appealing 205bp over yen swaps. The small ¥6bn FRN came at 220bp over three month Libor.
While other US borrowers categorised as financials such as Aflac and General Electric Capital Corp (GECC) have also successfully accessed the Samurai market in the last year, Tokyo-based bankers say that these issues from US borrowers (financial or corporate) are likely to be few and far between, for two reasons.
The first is that for most dollar-based borrowers, the economics of issuance in yen is less compelling than for euro-based entities. "We have seen various US corporates utilising the Samurai market in the past," says Gen Sakai, managing director and head of debt syndicate at Bank of America Merrill Lynch in Tokyo. "However, given the strength in the US domestic market and as long as the basis swap stays at these levels, Samurai supply from US corporates will remain at low levels."
The second factor that has been holding back US issuance in the Samurai market, say bankers, is uncertainty about the Foreign Account Tax Compliance Act (FATCA) in the US. "As things stand at the moment, US borrowers issuing Samurai are generally subject to US withholding tax," says Shohei Takahashi, joint head of international debt capital markets at Nomura Securities in Tokyo. "Until we have more clarity about the treatment of Samurai bonds under FATCA we are unlikely to see much issuance by US borrowers."
Looking ahead, bankers say that the broader potential for corporate issuance in the Samurai market remains subdued relative to the scope for financials, for a number of reasons. One is that their overall funding requirements are modest relative to the bank sector. Another is that because the corporate sector is in relatively healthy shape, there are few obvious cost benefits to be generated from funding in yen compared to core currencies. As a consequence, corporate issuance in yen will generally be driven either by a commitment to investor diversification or by a requirement for local currency (as was the case for Renault)."Corporates spreads have generally been tight and steady. It is therefore not always easy to find yen opportunities in the public market," says Amalou. "But we have seen some examples where the yen funding strategy has still been appealing. France Télécom, for example, came at 63bp over yen swaps for a five year deal, which was broadly in line with where a new euro bond could have priced."