The swearing in of Japans fifth prime minister in three years gave headline writers a heaven-sent opportunity. "Yes, we Kan," wrote, among others, Chiwoong Lee, senior economist at Goldman Sachs in Tokyo, in a report on the economic impact of the appointment of Naoto Kan.
Kan, 63, was finance minister before replacing the more flamboyant Yukio Hatoyama as leader of Japans ruling Democratic Party at the end of May.
How much room for manoeuvre Kan has to address the structural weaknesses of the Japanese economy is open to question. Lee wrote in early June that Kan inherited an unflattering government support rating and an economic recovery past its peak.
His biggest headache is Japans mountain of public debt.
Fitch warned recently: "Japans government is one of the most heavily indebted in the world and its debt burden is expected to rise for the foreseeable future, likely putting downwards pressure on creditworthiness in the medium term without sustained economic recovery and fiscal consolidation."
Kan has not minced his words about the potential severity of Japans long-term debt problem. In one of his first speeches as prime minister, he announced that Japans public finances had become "the worst of any developed country" and that it was at "risk of collapse". Strong words, presumably directed more at domestic taxpayers, who will soon be asked to dip further into their pockets, than at overseas investors. Nevertheless, local as well as international investors can scarcely fail to have taken note of Kans warning that, "if we maintain the current level of issuance of new bonds, outstanding debt will surpass 200% of GDP in a few years".
There is no suggestion that Japan will have any difficulty in absorbing this years supply of JGBs, which is forecast to reach ¥44.3tr. Quite the reverse. The flight to quality occasioned by the Greek crisis, and more recently by concerns over Spain and Hungary, has increased strengthened demand from local investors for JGBs.
"Japanese investors famous home bias and their concerns about credit risk in Europe have encouraged them to focus on the domestic market," says Tetsuya Kodama, managing director, fixed income, at Deutsche Securities in Tokyo. "Their focus has been on risk-free products in their own currency and the greatest beneficiary of that has been the Japanese government."
Over the medium term, too, market participants are relaxed about the capacity of Japans huge retail savings to hoover up the countrys rising supply of government bonds. As Tomoya Masanao, managing director and portfolio manager at Pimco said in April: "Japan has been able to manage to keep its government bond yields at extremely low levels over the past decade. The private sector savings have been more than enough to finance the public sectors deficit, resulting in a large current account surplus."
Domestic demand does not, however, represent a bottomless pit for the JGB market. Much of the support for government bonds comes from the domestic banking sector, which has had precious few alternative outlets for its massive liquidity.
Chris Scicluna, deputy head of economics at Daiwa Capital Markets in London, says: "As the recovery matures and as companies begin to invest in fixed capital, banks will channel savings towards other areas than JGBs."
Scicluna adds "With an ageing population, households will gradually run down their savings, so pension funds will see a decrease in the inflows they can channel into the JGB market," he says. "At an aggregate level Japan will move from being a country running current account surpluses and enjoying excess liquidity to one that runs current account deficits and relies on funds from overseas."
This is a tough prognosis. As Scicluna says, economic history in countries such as the US, the UK and Germany suggests that the move from surplus to deficit prompts a sharp upward move in long term interest rates. For Japan, the cost implications of such an upward move will be big.
It is no surprise that Japans Ministry of Finance (MOF) has prioritised the promotion of the JGB market among international investors, whose participation in the market is modest. Although the absolute share of foreign investors in the JGB market rose between March 2004 and September 2009, from ¥19.6 to ¥39.4tr, they still only accounted for 5.8% of the outstanding volume of ¥680.8tr. That is an exiguous share compared with foreign ownership of government bond markets in Germany (53.8%) or the US (47.7%).
"Over the longer term, the MOF will have no choice but to encourage more foreign investment in the market," says Scicluna. Japans Advisory Council on Government Debt Management appears to agree. Its discussion paper on the challenges of Japans debt management policy, published in December 2009, emphasised the need to diversify ownership of JGBs among life insurance companies and pension funds, as well as retail and foreign investors.
The report warned: "A large proportion of JGBs are held by deposit-taking financial institutions. Such structure involves [the] risk of driving JGB transactions [in] one direction, when the markets go under certain stress. It is [therefore] important to further encourage various types of investors who have different investment behaviours to hold JGBs."
Promoting JGBs internationally is one thing. Presenting a compelling argument as to why overseas investors should consider buying them at such low yields is quite another. "One case for buying JGBs is that if investors are optimistic about the outlook for the global economy, the return of risk appetite will lead US Treasuries and other government securities to underperform JGBs," says Scicluna.
At Credit Suisse in Tokyo, head of fixed income strategy Kenro Kawano says that to become too fixated about yields in the JGB market is to miss the point about the role they should play in foreign investors portfolios. "Every time in the last 10 years that I have been asked this question I reply that the low nominal yields are only a small part of the equation," he says.
Kawano says that what has been much more important, from the perspective of overseas investors in search of alpha in the Japanese market, has been the performance of the currency.
Today, he adds, there are clear indications that investors concerned about the precarious prospects for the euro have sought refuge in the yen market. In the four weeks after the start of May, says Kawano, foreign investors bought ¥5tr of yen bills. That, he says, may not be a gross figure because of redemptions. Nevertheless, Kawano says that as it compares with the usual monthly figure of around ¥1tr, this is a huge spike.Others share the view that JGBs will become more attractive to international investors. "We expect a neutral budget policy for the JGB market through next year, and we dont think the regulatory environment in the market will be an obstacle for encouraging foreign investment as higher yields will attract more foreign investors," says Chotaro Morita, chief strategist for Japan at Barclays Capital in Tokyo.
Borrowers wary of the benefits of foreign travelDomestic funding for Japanese borrowers remains so cheap that few want to head to the international markets. However JBIC and DBJ are flying the flag among foreign issuers, writes Philip Moore.
Rating agencies are not popular with many borrowers and Japan Bank for International Co-Operation (JBIC) is no exception. On the morning of January 27, it was building a book for its $1.25bn five year global benchmark, when news broke that Standard & Poors had revised its outlook on Japans AA long term rating from stable to negative.
S&P said at the time: "The Japanese governments diminishing economic policy flexibility may lead to a downgrade unless measures can be taken to stem fiscal and deflationary pressures."
Some investors inevitably dropped out of the book. "It was unfortunate that S&P surprisingly changed the outlook on our guarantor, Japan, during the marketing period," says Shigeya Kobayashi, head of treasury at JBIC in Tokyo.
"However, by revising price guidance from 25bp-28bp to 28bp-30bp over mid-swaps, we were able to generate strong demand from high quality investors and to price the benchmark at the tight end of the revised range." Demand was in excess of $1.4bn, with distribution well diversified by investor type and region.
Januarys successful deal built on the strong track record that JBIC cultivated in the international capital market following its reorganisation in October 2008, which established the bank as the international arm of Japan Finance Corp (JFC). Kobayashi says that reorganisation has had no impact on JBICs credit profile as a quasi-government issuer. "We have been explaining to investors that regardless of the reorganisation, the necessary government support structure for our policy-based finance will be maintained," he says. "All JFC shares will continue to be held by the government and all existing and future borrowings will retain the explicit guarantee of the government."
With an international funding requirement of ¥560bn ($6.1bn) in the fiscal year ending March 2011, JBIC is committed to being a regular borrower in the international market. "We aim to provide international investors with more regular benchmark issues," says Kobayashi. "We believe that this strategy will help our spreads tighten towards the levels commanded by the top SSA issuers."
Kobayashi says that although that may involve exploring euros and other currencies, as JBICs international funding requirement is in dollars, almost all issues outside the domestic market are either denominated in or swapped into dollars. "As long as the amount we borrow and the after-swap funding cost meet our targets, we can look at a range of different currencies."
For the time being, investors continue to endorse JBICs credentials as a leading global SSA borrower, and as an especially compelling alternative to European SSAs in the current turbulent market. In late April, for example, JBIC returned to the market with a $2.25bn two year global via Barclays Capital, BNP Paribas and Citi, which was priced at 17bp over mid-swaps. "The European sovereign sector was under intense pressure, so we believed appetite would be strong for non-European SSA names," says Kobayashi. JBIC was not disappointed, with Kobayashi reporting that the transaction attracted more than 50 high quality investors.
Japans other government guaranteed borrower that has tapped the international market to good effect over the last year is Development Bank of Japan (DBJ), which issued a $350m floating rate note in November 2009. "The order book for the DBJ FRN was almost $700m, but the borrower only had a requirement for $350m," says Tetsuya Kobayashi, head of debt capital markets at the Tokyo office of HSBC, which sole-led the transaction. "DBJ opted for an FRN because it was keen to target Asian investors, which accounted for 56% of distribution."
DBJ raised the bar at the start of the Japanese fiscal year this April, issuing a $1bn benchmark for the first time in the US dollar market, with a five year transaction led by Barclays Capital and HSBC, which generated orders of $1.4bn. Pricing was in line with guidance at mid-swaps plus 27bp, which compared with 28bp over for the previous Japanese government guaranteed five year dollar benchmark printed by JBIC in January.
"We started preparing the issue early in March, and given the market situation and the Greek debt crisis, we believed that the earlier in the fiscal year that we could tap the market, the better," says Yoichiro Yokoyama, director general of the treasury department at DBJ in Tokyo. "Looking back, the timing was very good. We had very strong demand, especially from Asian investors, especially central banks which are very cash-rich in dollar terms and have been relatively unaffected by the Greek crisis."
Investors see consider DBJ a relatively safe haven, adds Yokoyama. "Although Japan has a relatively high debt, because the majority of that debt is held by domestic investors it is regarded as being different from the structure of Greek or other European sovereign debt."
DBJ has an overall international funding budget on a government guaranteed basis in the current fiscal year of $1.6bn, which limits its room for manoeuvre in printing further benchmarks. "We still have a budget of roughly $500m equivalent for the rest of this fiscal year, which isnt sufficient for a benchmark issue of $1bn," says Yokoyama.
"But as demand for loans rises we may launch another guaranteed issue, even if it is a smaller transaction. We may also come back to the market with a US dollar FRN. Alternatively, we may choose currencies other than US dollars, depending on market conditions. Also, for our non-guaranteed issuance we generally issue on a reverse enquiry basis using our MTN programme in smaller sizes ranging from $20m to $100m, which gives us more flexibility than guaranteed transactions in terms of size, timing, currency and so on."
Bankers say that from a credit perspective investors have tended to see little difference between DBJs guaranteed and non-guaranteed issuance, and that the postponement of the plan to privatise the bank has strengthened investor perception of its credit profile.
"Existing investors have been comfortable with DBJs standalone credit profile as a policy institution," says Makoto Wakamatsu, director of debt capital markets at Barclays Capital in Tokyo. "The fact that DBJ has issued non-guaranteed EMTNs in US dollars that are paying only small premiums to its guaranteed bonds to accommodate reverse enquiry from international investors confirms that any influence is marginal."
He adds that no investors expressed any concern about the postponement of the privatisation when it executed its $1bn five year benchmark. "Some investors welcomed the postponement, as it indicates that the strong relationship between DBJ and the government will be maintained for the time being."
The robust demand for exposure to DBJ, says Yokoyama, has prompted a continuous tightening in its spreads in the domestic market. In April 2009, DBJ sold ¥90bn of bonds at three, five and 10 year maturities, all priced at JGBs plus 30bp. When it returned to the market last October with a ¥40bn three and five year issue, the spreads were 12bp and 11bp over JGBs respectively.
"Spread tightening has continued this fiscal year," says Yokoyama. "When we tapped the market this April in three and five year maturities, we priced at a single digit premium of 9bp over JGBs in both tenors, which was the tightest level we have achieved in the domestic market for more than four years."
Bankers say that between them, JBIC and DBJ have taken important strides towards enhancing the international visibility of Japanese government guaranteed borrowers and cementing their credentials within the global SSA sector.
"The marked improvement in liquidity and enhanced price transparency have provided great comfort to investors," says Wakamatsu at Barclays Capital, which has been involved in four of the six international benchmarks in the last 12 months. "With four benchmark sized deals successfully issued, a transparent and liquid Japanese government guaranteed bond curve has now been established from two years out to five."
As well as building a yield curve, JBIC and DBJ have successfully built a new and much more diverse investor base for Japanese government guaranteed bonds. "Traditionally, central banks and other official institutions formed an integral part of the investor base, just as they do for European SSA deals," Wakamatsu adds. "However, DBJ and JBIC have successfully established access into a wider investor base, including asset managers and banks in the US and Europe."
That, says Wakamatsu, has helped build a solid springboard for Japanese government-guaranteed issuance. "On the back of fair pricing relative to European SSAs, healthy oversubscription levels have helped to generate follow-through demand, which has in turn supported an outperformance of Japanese government guaranteed bonds in the secondary market," says Wakamatsu. "This strategy will provide an important incentive for investors to participate in the next international offerings from the Japanese government guaranteed sector."
Bankers say that the paucity of government guaranteed issuers is another factor that may generate resilient demand from overseas investors. "One other government guaranteed borrower, JFM, has a budget for an international bond issue this year," says Jun Kigoshi, head of corporate banking at JP Morgan in Tokyo. "But as supply from the government guaranteed sector is limited, borrowers such as JBIC and DBJ are regarded by international investors as enjoying scarcity value within the global SSA sector."
Beyond the government guaranteed entities, issuance in the international capital market by Japanese borrowers has been sporadic at best. Gen Nakahara, head of debt capital markets at Bank of America Merrill Lynch in Tokyo, says two transactions in 2010 have bucked the trend.
The first is the $2bn dual-tranche senior issue led for Bank of Tokyo-Mitsubishi UFJ (BTMU) in January by Bank of America Merrill Lynch, Mitsubishi UFJ Securities and Morgan Stanley. This was subdivided into two $1bn fixed rate tranches with maturities of three and five years, priced at 112.5bp and 135bp over US Treasuries respectively.
"The BTMU transaction was interesting because although we have seen plenty of subordinated tier two and/or hybrid tier one transactions from Japan in the past, this was the first significant issue from a Japanese bank in senior format," says Nakahara.
He adds that although BTMU was very liquid in the US dollar market with no shortage of funding alternatives, including short term money market products, it had sound motives for exploring an international term debt alternative. "From a very conservative liquidity management perspective BTMU thought it was time to look at diversifying its funding sources in the dollar term market," he says. "But it also sees growth opportunities outside Japan, so the senior dollar deal was a good way of raising its international profile.
Certainly, BTMU appears to be the most internationally-minded of the Japanese banks in its funding strategy. In May, for example, it became the first foreign bank to issue in the Chinese Panda market.
Local financing benchmark
A similar strategy to BTMUs underpinned the second transaction Nakahara picks out among non-government guaranteed Japanese borrowers. This was the $750m five year issue from the diversified financial services group, Orix Corp, led in April by Bank of America Merrill Lynch, Morgan Stanley and UBS. "Orix issued its inaugural dollar deal in 2006, so its outstanding dollar paper is illiquid and no longer serves as a pricing benchmark," says Nakahara. "Orix is looking to grow its business outside Japan, especially in Asia, so its successful dollar deal potentially establishes a benchmark for local financing in Asia."
Few would be brave enough to forecast a heavy wave of issuance from Japan, but Nakahara hopes the success of BTMUs transaction in January may encourage others from the banking sector to assess the diversification opportunities of the dollar market. "Especially in light of Basel III, Japanese banks are focusing more intensively on conservative liquidity management, so provided markets stabilise I would not be surprised to see other banks issue in dollars in senior format," he says.
Corporate issuance outside the domestic market continues to be very thin on the ground. A rare exception came in February, when Tokyo Electric Power (Tepco) made its first visit to the Swiss franc market since February 2007, with a Sfr300m deal led by BNP Paribas, Credit Suisse and UBS.
Issues such as Tepcos Swiss franc deal, however, are likely to be the exception rather than the rule for Japanese companies. "The Japanese domestic market continues to provides cheap money for Japanese corporates and utilities, which makes it difficult for many of them to justify going to the international market," says Kigoshi at JPMorgan.
Domestic funding opportunities are so cheap, say others, that they wipe out all the cost advantages of the basis swap, which for Japanese borrowers is highly competitive.
"The way the basis swap is working in all currencies means that borrowers swapping back from dollars to yen can generate a massive pick-up of between 40bp and 50bp depending on the maturity," says Tetsuya Kodama, managing director and head of international and public debt capital markets at Deutsche Securities in Tokyo.
"In normal circumstances that would represent a wonderful opportunity for Japanese borrowers to go to the US market. But rates in the domestic market are so low it still makes no sense from a cost perspective."
The economics of issuance in euros is no better for Japanese borrowers, says Kodama. "At Deutsche we know that European investors would be delighted to be offered a good Japanese name in euros," he says."But although the dollar/yen basis is so attractive, the economics of the euro/dollar exchange is not. So although the net result is that the swap from euros to yen may be marginally positive it is nowhere near enough to compensate for the low funding costs in the domestic market."
Basis swap to determine international yens futureTop quality credits are being welcomed into the international yen market where there is strong demand for the right names. The defensive qualities of companies make them attractive too, writes Philip Moore.
When Norways Eksportfinans made its debut in the Samurai market in June, with a ¥30bn five year deal via Citigroup, Mizuho and Mitsubishi UFJ Morgan Stanley, the transaction underscored three prominent themes in the international yen market.
The first was that for the right credit, there is an abundance of demand among Japanese investors for yen-denominated product in a range of formats. Richard Tarn, executive director at Mizuho in London, says that the leads on the Eksportfinans deal built a book of close to ¥100bn, and that the borrower could comfortably have increased the size of the transaction had it not chosen to cap it at ¥30bn.
That made for a challenging allocation process. "The Eksportfinans deal achieved exceptionally broad distribution," says Paul Morganti, head of global debt capital markets at Mitsubishi UFJ Securities in London. "We filled over 100 orders in a $330m equivalent transaction."
The second characteristic of the international yen market over the last year, be it in the Samurai, Euroyen or global yen sectors, is that borrowers have needed to tick very similar boxes in their credit profile. While at first glance there may not be much in common between the sovereign, agency, financial and corporate borrowers that have issued international deals recently, the thread that links them is the resilience of their credit quality.
This has been a prerequisite in a market where investors were traumatised by the collapse of Lehman Brothers and the Icelandic banking sector. "After the Lehman collapse Japanese demand for international credit more or less shut down," says Morganti. "Lehman and Kaupthing were the first two examples of defaults the institutional Samurai market had seen. Although Argentina had issued in yen, it had only done so in the retail market."
The resilience of that credit quality is obvious enough in the case of an agency such as Eksportfinans, which is regarded as offering quasi-Norwegian government exposure.
First class credit quality is also self-evident enough in the case of a borrower such as Ontario. In May the Canadian province issued its first large yen transaction for a decade when it launched a ¥132.6bn ($1.46bn) dual tranche deal in five and 10 year maturities via Bank of America Merrill Lynch, Credit Suisse and Mitsubishi UFJ. This was the largest yen issue since RBS printed a government guaranteed ¥220bn three year deal in March 2009.
Originally marketed as a ¥50bn issue, both tranches were very healthily bid, although the fragility of markets at the end of May led each tranche to be priced at the wide end of guidance, which was the equivalent of 25bp over swaps for the ¥95.7bn five year tranche and 35bp over for the longer dated ¥36.9bn bond. Japanese investors, led by banks and insurance companies, accounted for 88% of the placement of the five year tranche and for all but 2% of the 10 year bond.
The credit quality of borrowers that have successfully tapped the Samurai market in 2010 is less immediately obvious in the case of a sovereign such as the Philippines, which issued a ¥100bn 10 year bond via Daiwa Capital Markets, Mitsubishi UFJ and Nomura. Priced at the tight end of its range of 85bp-100bp over swaps, the Philippines deal owed its warm reception to the strength of its structure as a JBIC guaranteed issue rather than to credit profile of the borrower itself.
"Because JBIC guarantees 95% of the Samurai deals weve seen from sovereigns such as the Philippines and Indonesia, they are regarded as offering double-A risk, so their pricing at between 80bp and 100bp over swaps is considered to be quite generous," says one syndicate manager.
The other category of international borrower that has become more active in the yen market since the summer of 2009 is the corporate sector. The common theme that links the corporate borrowers that have successfully tapped the yen market in Samurai or global format has been their defensive qualities. Examples of corporate borrowers in highly defensive sectors that have made very effective use of the Samurai market in the recent past include those in sectors such as retailing (Wal-mart) and utilities (Electricité de France).
Another very defensive name that has provided a variation on the theme by issuing yen in global format is Procter & Gamble. "Procter & Gamble was a great name for the yen market given its defensive characteristics and broad global distribution," says Morganti at Mitsubishi UFJ. "We set out to do between ¥50bn and ¥75bn and ended up with a book of just under ¥150bn which allowed us to print a ¥100bn global bond, placed predominantly but not exclusively with Japanese investors."
Alongside Mitsubishi UFJ, the P&G bond was led by Citigroup and HSBC and priced at 28bp over mid-swaps. "It was very satisfying to see such strong demand for the P&G transaction," says Tetsuya Kobayashi, head of debt capital markets at HSBC in Tokyo, which itself had issued a debut samurai in 2009.
"It is very rare for a coporate to issue in global yen format, and P&G was only the fourth borrower in the market, after Pfizer, MacDonalds and Wal-Mart Stores."
Other issuers in the Samurai sector in 2010 have included better rated banks. Westpac opened the market in January with a non-government guaranteed ¥111.3bn dual tranche transaction which included the first seven year tranche (accounting for the ¥11.3bn) from an Australian issuer in the market. Rabobank and Credit Suisse have also successfully accessed the Samurai market.
Bankers say that investors in the international yen market are unlikely to compromise on their exacting standards. "At the start of the year we sensed that some investors might be tempted to look further down the credit curve in search of some added yield," says Tarn. That, he says, is now looking less likely than six months ago for two reasons.
First, the volatility that has run through global markets has inevitably unnerved investors. Second, that volatility has pushed spreads back out to more attractive levels. "Investors are under less pressure to go further down the credit curve because spreads are once again meeting their funding targets," Tarn adds.
The third feature of the Eksportfinans transaction which has been a leitmotif of the Samurai market recently is that the motivation for the deal was not the all-in cost of funds that the market was able to offer. Martine Mills Hagen, head of funding at Eksportfinans in Oslo, says that the Samurai transaction was a strategic one aimed at accessing Japanese institutional investors, which the borrower had not accessed to any great extent.
"We have been very active in the structured note market, but we wanted to diversify our investor base in Japan. We also wanted to build on our relationship with the arrangers that had been so supportive of us in the Japanese market for several years," she says.
"We capped the deal at ¥30bn because although the pricing in yen terms was exactly in line with our target, the basis swap made the pricing less attractive in dollar terms. We made it clear from day one that we would not be able to increase the size of the transaction, which made the process quite challenging in terms of allocations. But it was a fantastically successful transaction and we were very happy with it."
It was little wonder that the Eksportfinans deal generated such enthusiastic support. "The transaction was priced at 20bp over yen swaps which is one of the tightest levels for any Samurai in the last four or five years," says Morganti. "Despite this, it was still offering more than double the prevailing yield of the underlying JGB. Quasi-Norwegian government risk at 89bp is very compelling compared with a JGB offering 39bp."
Bankers say that for Ontario, too, the economics of yen issuance were scarcely compelling. "Ontario is the closest proxy in the Japanese market to Canada itself," says one. "Because Canada itself doesnt issue much outside the domestic market, Ontario is probably the highest grade credit that would work in the Japanese market with the basis swap at its current levels. Even then, however, Ontario had to pay 40bp or 50bp above the levels it would expect to achieve in dollars, which is not an equation that all issuers would be comfortable with."
The same banker believes Ontario had a requirement for yen, which of course would have helped to support the economics of the transaction. Ontario declined to comment on whether it kept or swapped the proceeds of its yen deal.
The economics of issuance in the Samurai market have also been delicate for a prolific triple-A rated borrower such as the EIB, which at the start of June issued in plain vanilla format for the first time. Historically, the European supranational had issued only structured Samurais in private placement format, so its ¥60bn 10 year transaction via Mitsubishi UFJ marked something of a new departure.
"The Samurai deal we did this year is directly comparable to the plain vanilla Euroyen transactions we did in 2009, because they were all placed with domestic investors, albeit in a slightly different format," explains Eila Kreivi, head of funding for the Americas and Asia Pacific at EIB in Luxembourg.
"The dollar/yen basis swap on shorter dated maturities has been unworkable, and at the 10 year maturity it is also expensive," she adds.
"The 10 year basis is quoted at 32bp-42bp which takes away a big chunk of the economics, but you can occasionally find windows of opportunity when the sun and stars are aligned. This is what happened last year and this time as well, allowing us to issue at a level that was acceptable to Japanese investors."
Those investors, says Morganti at Mitsubishi UFJ, were happy to look at a top-rated supranational credit for inclusion in a government bond portfolio as a JGB proxy.
EIB did not disclose the pricing of the Samurai, but Kreivi says that it offered the small pick-up over JGBs that is a prerequisite for domestic investors. "Compared to a hypothetical 10 year dollar benchmark, the transaction was probably slightly more expensive than we could have achieved in the dollar market, but this comparison remains hypothetical as the dollar market is not receptive to long tenors," says Kreivi.
"It was also hard work. But it was definitely worthwhile, because it gave us the chance to diversify our reach into some of the bigger domestic accounts that dont buy EIB in dollars or euros."
Europes other leading SSA borrower, KfW, which has a funding requirement in 2010 of between 70bn and 75bn, has also been in the yen market recently, albeit in global rather than Samurai format, which meant that its main appeal was to overseas rather than Japanese investors. At the end of April, it issued a ¥40bn three year transaction, sole led by Nomura, which was the first global yen deal from a European SSA borrower for more than a year and served as a JGB surrogate.
"We dont have a natural need for yen, which we always have to swap out," says Petra Wehlert, head of funding at KfW in Frankfurt. "To make a transaction appeal to investors we need to show a spread over JGBs. At the time we were able to offer a spread of 10bp. But the deal was sold mainly into Europe. Our aim is always to combine domestic with international demand, and we did sell some of our global yen deal into Japan. But to make deals interesting for the local investor base, you need to show a very high spread over JGBs."
This does not mean that the domestic yen market is an unimportant source of funding for KfW. Quite the reverse. "It is 25 years ago this year that Japanese insurance companies began to invest in KfW for the first time, and the market has been important to us ever since," says Wehlert. "For example, we are very active in the Uridashi and MTN market."
While being hostage to the vagaries of the basis swap is one obvious drawback of the Samurai market, another is the administrative burden associated with issuing in it.
"There was a great deal of documentation involved in our transaction," says Mills Hagen at Eksportfinans. "Of course most of that is taken care of by our legal counsel. But its true that it takes a lot of work, which is why when you start looking at the Samurai market and commit to putting the documentation in place you do need to make every effort to go ahead with the transaction."
That, of course, is not always possible, given how capricious the swap window can be. Mills Hagen says that Eksportfinans knows that the market can shut very suddenly, meaning that all the time and resources channelled into the documentation can go to waste. "We had experience of that a couple of years ago when the market moved away from us," she says. "But that was a product of the general post-Lehman turmoil in the market."
Views on the outlook for the international yen market are mixed. One Tokyo-based banker speculates that the Samurai market would be a good way for some of Europes better-rated sovereign issuers to diversify their sources of funding.
Others are not so sure. "Given the basis swap dynamics at the short end of the curve, top rated European SSA borrowers would need to be issuing at 40bp or 50bp below swaps to generate a competitive cost of funds," says Morganti. "Based on where Japanese swap rates are, that would equate to a coupon of zero, which obviously isnt going to work."