The Samurai market has proven resilient this year. Some 25 deals had raised $17.46bn equivalent by September 16, according to Dealogic.
And the pipeline appears to be healthy. "Samurai is the market that stands out as being very strong this year," says Alexandre Sautour, head of primary markets at BNP Paribas Securities (Japan) in Tokyo. "It is to some extent a consequence of the fact that after March, domestic issuers have stopped issuing, and investors are keen to put their money to work. Samurai issuers have taken advantage of the lack of domestic issuance."
This is partly because domestic utilities, normally a considerable part of the market, have not issued since the earthquake, while it becomes clear what the nuclear power policy will be.A look at the top 10 deals year to date (see chart) shows a number of US and European banks among the top 10: HSBC and JP Morgan have accounted for the biggest deals this year, while Rabobank Nederland (twice) and Swedens SBAB have also been active. But all of those deals have come since May, and since then toxic sentiment towards Western markets has prompted some US and European issuers to rethink, such as Bank of America, which pulled a Samurai in June, one week after Société Générale had done the same. Instead, attention has focused upon two pockets of issuers: Korea, and Australian banks.
"Theres been a fall-off in issuance from the US and European bank sector which normally dominates the issuance league table," says Theodore Lo at RBS. "Now thats gone, there is extra cash that can be put elsewhere, and that opens an opportunity for other issuers. The Koreans and Australians have been the beneficiaries."
In September Korea Finance Corp raised ¥30bn ($391.6m) in a three-tranche Samurai including a ¥15.5bn two year bond, ¥7.5bn three year and ¥7bn five year. All were priced at the tight end of guidance, and the five year note was added on the back of investor demand.
The deal was representative of continuing appetite for Korean names. The biggest so far this year was from Kexim, which raised the equivalent of $994m in June. Others have included Hana Bank, which raised ¥30bn in a dual-tranche Samurai in August, while Posco and KDB have announced transactions for October and IBK is also expected to issue.
Australians, too, have enjoyed diversification and cost-effective funding in yen this year. Westpac and Commonwealth Bank of Australia launched ¥100bn deals, in August and June respectively, while ANZ and National Australia Bank have also launched in decent size. All four banks are believed to have hit their yen funding targets for the year but could be tempted to come back to a welcoming investor base; on Westpacs most recent deal, for example, a ¥74.4bn five year fixed rate note had its guidance revised inwards, and then came at the tight end of that amended range.
At the heart of this flurry of Korean and Australian paper ther is a coincidence of interests.
"Samurai markets can provide attractive opportunities to the Japanese investor," says Reiko Hayashi, head of debt capital markets at Merrill Lynch Japan Securities. "For international issuers, there is stable demand, and the cost can be relatively good against other markets."
Seiichiro Miyaoka, head of debt capital markets at UBS, adds: "The spread on Samurai bonds is much wider than those of domestic corporate bonds. That is very attractive for Japanese investors." For issuers, "the Japanese market is still stable and resilient vis-à-vis other funding markets like the US, which is one reason Samurai borrowers are still looking at the Samurai as a funding market."
Still, the market is not completely shut to others. BofA Merrill recently announced a mandate from Scandinavias Nordea Bank to launch an inaugural Samurai bond.
"But Japanese investors are very selective in the names," says Hayashi. "They are concerned about the European situation, so they only pick up the names they are comfortable buying. If European names come, they should be far away from the so-called PIG countries."
Sautour agrees. "At the moment there is less appetite for European issuers, and many will not be able to come to the market. There is always a price at which people are able to issue, but I dont think they would want to pay the spread that would be needed for printing."
Many investors say they are not allowed to invest in European names because their volatility is so high. Still, bankers say Japanese investors do differentiate between different European states; Scandinavia and the Netherlands, for example, are still considered largely remote from eurozone problems.
There is a separate class of Samurai issuance: those carrying a guarantee from JBIC, who are mainly emerging market sovereigns. Turkey launched a ¥180bn 10 year guaranteed note in March; in recent years most other issuers have been Latin American or Southeast Asian, among them Indonesia, the Philippines, Mexico and Brazil. A JBIC guarantee could perhaps provide a way in for European names; in the meantime Colombia is expected to be the next guaranteed sovereign issuer.
Uridashi tranches tap into the same opportunity that Samurai issues do. "Japanese investors need to buy something attractive. The domestic issuance is very boring because of the tight spreads," says Hayashi. "So a good international name can be acceptable to retail investors."
Masayoshi Tezuka, director and head of Japan debt syndicate at RBS, says: "The Uridashi market is the hottest market in Japan right now: many issuers manage to price bonds at the tightest level compared to other markets."
But Uridashi issuance has declined in recent months as interest rates have come down in some higher yielding currencies, and because of volatility. According to Dealogic, the 10 biggest Uridashi deals of the year led by deals from Nomura Europe Finance and RBS all came by June 15, with all but two of them by April 8.
"But on the private placement side we see a relatively healthy stream of business," says Sautour. "In euroyen in particular, there is still demand for credit, though its obviously very selective."
It will be interesting to see the impact when utilities do return to the domestic market and suck up some of the demand that is now going to foreign names. "We dont really see anything coming anytime soon," says Sautour. "Theres still a debate about energy policy which is putting a lid on the ability of issuers to come to the market; the CDS market remains fairly wide and investors are really not willing to return to that segment just yet."
One market participant, though, expects a utility to come to market "next month [October], or November before the end of the year. Theyve got to refinance." Despite the high CDS levels, he thinks it would tighten very sharply and that the right issuer could probably launch at JGBs plus just 40bp-50bp at the moment.Its certainly true that utilities cant stay out of the market forever, and when they return, their volumes and their reception will have knock-on effects throughout the yen markets.
|Why the international elite consider Japan crucial|
For top-drawer international issuers, Japan represents a crucial part of their investment constituency if not always in yen.
"Our conversation on yen-denominated issuance is going to be very short: we havent done any this year," says Sandeep Dhawan at European Investment Bank in Luxembourg. "The yen basis swap has ground out to levels that would make pricing on new issues unattractive for yen investors. For us to issue at competitive levels to our issuance in euros or dollars, we would come out in yen at sub-JGB levels, so clearly domestic investor interest would be somewhat limited." In previous years, EIB has generally found a window for yen issuance, through a global yen, Euroyen or Samurai issue, but this year has provided no such opportunities.
Thats not to say, though, that Japanese investors arent enormously important for EIB and similar institutions. "We access Japanese investors across a range of currencies, structures and formats, be they global bond issues, EMTN, Samurai or Uridashi. We offer a recognisable, triple-A supranational name and they account for a substantial proportion of our investor base."
As Dhawan says: "There is no investor base you can reach in more ways and through more different approaches" than in Japan. Different products give access to different parts of the investor base. Larger, liquid global bond issues go to large banks and money managers; issues in higher yielding currencies like Brazilian real, Turkish lira and Australian dollars go to yield-hungry retail mutual funds and insurance companies. Uridashi issues go to high net worth individuals and retail investors of Japanese banks, and Samurais tend to go to domestic institutional investors.
KfW has been more active in yen, and has been particularly busy in Uridashi issues, although that is across a range of currencies. "That has been a very strong market for KfW this year," says Alexander Liebethal, head of new issues, structured notes and private placements. "Investors are looking for yield enhancement in a very volatile market. We have done almost 30 Uridashis this year, and are approaching an amount of Eu2bn equivalent." In previous years, the total has usually been closer to Eu1bn. KfW has also conducted 45 private placements in yen this year. "Typically a reverse inquiry-driven market," says Liebethal.
EIB has tended to issue more plain vanilla style Uridashis than structured ones, but it says that since recent changes in Brazilian regulations, a large part of the market, in popular BRL, has fallen away.
While Japans safe haven status is generally more relevant to investors than issuers, it does have the effect of making Japans investor base stable. "Over the past 12 months Japanese investors have continued to be active in the dollar and euro market," says Horst Seissinger, head of capital markets at KfW. "We would expect to continue to see solid placement of our euro and dollar bonds, as well as Australian dollar bonds."
"My impression is that Japanese investors are very reliable, at least if it comes to our name," says Liebethal. "They seem to be in favour of a German credit offering a bundle of different products with opportunities for yield enhancement. Even after the earthquake there was no pause in our issuance activities."