While there has been turmoil in the euro and dollar markets, the yen sector has evolved this year to become a truly useful tool in the sovereign, supranational and agency treasurers kit. Japanese investors are open for issuance from non-domestic SSA borrowers, and the repricing of domestic debt has made yen funding attractive for many of these issuers for the first time.
"The market has become more attractive as there has been a fundamental shift in the pricing of the dollar market and euro markets after the collapse of Lehman," says Sam Amalou, the head of debt capital markets at Daiwa Securities SMBC Europe in London. "Both Lehman Brothers and Kaupthing had issued Samurai bonds, and after their bankruptcies, Japanese investors shifted towards more secure investments and adjusted their selection of credits. The natural choice for them was in the SSA names."
While Japanese investors have gravitated towards the SSA sector, so the sector has gravitated towards yen issuance. A big factor in that has been the emergence of the government guaranteed bank debt asset class: the high spreads these borrowers offer in the euro and dollar markets sent shockwaves through the SSA market by re-pricing their domestic funding. In turn, that made the yen sector more attractive.
"Looking back less than a year, SSAs were issuing deals at sub-Libor spreads," says Eila Kreivi, head of funding for the Americas, Asia and Pacific capital markets at the European Investment Bank in Luxembourg. "For the yen market, the swap spread was below Japanese government bond levels. This meant that we could not really issue in yen and appeal to the domestic audience. Now we are in plus-Libor territory, and we have been able to offer something to the domestic market for really the first time ever. This untapped investor base is really interesting for us."
Competing with GGs
The continued activity of government guaranteed borrowers in the euro and dollar markets over the coming months and, perhaps, years will impact on where SSA issuers can most cost-effectively raise funding.
"There is a lot to be refinanced and so this asset class will be around for a while," says Brian Lawson, head of syndicate at Nomura in London. "Once that winds down, pricing for SSAs in the domestic markets may come down, and so yen issuance will fade again. But there is no abatement of yen issuance at the moment, and there is healthy calendar going forward."
Government guaranteed issuers have also been active in the yen sector. In 2008 there were 11 deals worth ¥129.5bn, and by the end of April they had issued 26 transactions worth more than ¥1tr. These borrowers were mostly Australian financial institutions, but there has also been activity from European banks, such as Barclays Bank, which issued ¥110bn of three year government guaranteed paper at three month yen Libor plus 50bp in January.
The yen denominated deals from government guaranteed issuers have not affected the activity of the SSA borrowers in the same sector, but there are other issuers considering funding in the yen sector that could impede the access available to SSA borrowers.
"For the next three to six months Im optimistic, but after that its more difficult," says Lawson. "Japanese investors are traditionally very conservative, but there are whispers of demand from a handful of accounts for the best non-guaranteed banks and corporates. Of course, if they entered the yen market that might take away the opportunity from SSAs. I think there could be a small amount of nibbling in the private placement market for corporates and banks in the next few months."
Although analysts have compared the levels of SSA yen activity at the beginning of the year to the 2007 heyday of the market, volumes have been limited by a restricted, Japanese investor base. When issuing in yen, borrowers have always had to choose between the Samurai and Euroyen formats for their issues. While the Samurai structure allows borrowers access to a larger number of accounts in Japan (for a Euroyen deal issuers can only legally make a total of 49 approaches to investors), Euroyen deals are quicker, easier and cheaper to execute. As a result, Samurai have gone out of fashion with just one issue this year. But the vast majority of Euroyen transactions are actually being bought by Japanese investors.
While these accounts are seeking stability in the SSA sector, international investors that would have traditionally been the target for euroyen transactions have been harder to draw in.
But Sam Amalou of Daiwa suggests that once investors globally become active in the debt capital markets, euroyen transactions will become international again.
"In 2007 these were sold to a more international base," says Amalou. "If you see a resurgence of activity internationally then we should see even greater volumes coming to the market in the next few months."
Whatever the future holds for SSA issuers in Japan, the beginning of 2009 has offered a great opportunity for borrowers to diversify their funding. By the end of April more than ¥345bn had been issued in 13 transactions.
"In Japan, the pockets of liquidity are still very deep," says David Rudd, an executive director of debt capital markets at Mizuho in London. "Certainly there is interest from the Japanese investor base for high quality names, and for SSAs there is the benefit of investor diversification and getting deals of a longer maturity. Although most of the deals are still centred around five years, there have been some seven year issues and even 10 years, which you probably couldnt do in the dollar market."
Indeed, aside from the diversification on offer from the yen market, borrowers are able to access funding at maturities not available in other markets. In March, the EIB priced ¥50bn of 10 year Euroyen paper through Nikko Citi. The borrower felt that the pricing would not have worked out so well for a five year as it would have been more expensive than issuing directly in dollars, but the spreads started to work in 10 years. The transaction priced at three month yen Libor plus 40bp.
"The EIB deal was a highlight," says Lawson. "10 years is a difficult maturity but it appeals to life insurance companies. To get the 10 year deal away at a very sharp level to the five year was extremely well executed."
The following month, the borrower returned to the yen market, issuing ¥40bn of fixed seven year paper through Société Générale. Kreivi says that for the EIB, there are a number of advantages to issuing in the yen market.
"First of all, diversification is very important for us, but we are also able to get deals of reasonable sizes and there is quite a good demand for duration in this market, whether for seven, 10 15 or 20 year deals."
However, the difficulties involved in the execution and pricing of a yen transaction may take the sheen off the benefits of duration and diversification.
"There are so many moving parts for a yen issue," says Kreivi. "We have to look at the domestic pricing, at where yen-Libor would be against domestic issuers. We also have to look at the basis swap into dollars, and compare the yen pricing with funding costs in euros and yen. It always depends on the dynamic between the core currencies as to whether we will issue in yen, but Im carefully optimistic. If all the moving parts align, then there are good opportunities for issuance."Most SSA issuers do not have a need for yen and so have to be able to swap the funds in a cost efficient way. However, the yen five year basis swap is notoriously volatile and is pushed wider by large amounts of supply.
"At the moment, we are at the mercy of the basis swap," says Daiwas Amalou. "Issuers have some tolerance to absorb some of the volatility, but the tolerance has limits. They will be prepared to pay a certain price for diversification but it has to make sense in the context of alternative markets. And usually, its the bigger borrowers with larger funding programmes that have more tolerance."
ICOs lonely Samuari
For SSA borrowers, yen transactions still dont offer attractive arbitrage funding but instead offer the chance to get funds from a very different set of accounts, including major institutional investors. And while in the past, the domestic Japanese investors found the Europeans SSAs pricing to be too expensive, with the re-pricing of the market last autumn, they now have an opportunity
Instituto de Crédito Oficial (ICO), for example, kick-started the Samurai market, when it printed a ¥50bn dual tranche transaction at the start of the fiscal year in April. The lead managers Daiwa SMBC, Mitsubishi UFJ and Mizuho had originally marketed a floating rate deal, but a fixed rate tranche was added after strong investor demand. In the end, the ¥27.1bn floating rate tranche was priced at six month yen Libor plus 68bp, while the ¥22.9bn fixed rate tranche was priced at the re-offer of yen swap rate plus 50bp, which translated to a fixed coupon of 1.67%.
"There was an amazing response from investors: they liked the name, they liked the credit story and they liked the spread," says Rodrigo Robledo, a senior funding official at ICO in Madrid. "The deal was vastly oversubscribed and we could have printed more than ¥50bn. We had done a Samurai transaction about 10 year years ago, but that was a structured deal."
While the transaction exceeded the borrowers initial expectations of over ¥30bn, a deteriorating basis swap in the days before pricing meant that the issue was limited to the ¥50bn size. Yet even with these problems with the basis swap, the borrower regards the yen market as part of its future funding activity.
"The Samurai market is important for us in terms of diversification," says Robledo. "We have a Eu20bn funding programme for this year, and so having access to different investor bases is important. We are not an opportunistic issuer and we look to develop long term relationships with clients in Japan. Theres a possibility, if demand and market conditions are positive, we may issue another yen deal in the second half of the year."
While the government guaranteed issuance in the euro and dollar markets that has pushed the spreads for SSA transactions in their domestic markets wider looks set to continue for the near future, borrowers will continue to look to Japan to broaden their investor bases. But as much as issuers plan for future yen issuance, they must be aware that the window allowing them access to these investors can slam shut as easily as it was blown open in the autumn.