The Samurai market in 2004 has been characterised by plenty of demand but not enough issuance. However, with Japanese investors starved of spread and so eager for deals, and with benchmark spreads in the domestic corporate bond market so low, it is surely only a matter of time before issuers return in force to sate investor demand.
Volumes in the Samurai market were by early October already comfortably in excess of the total for 2003. The market has also enjoyed a solid variety of transactions, with a host of self-managed US bank issuers, as well as an array of bank, corporate and emerging market sovereign names.
?Looking down the list of issuers so far this year,? says Richard Tarn, executive director at Mizuho International in London, ?it is plain that the market has been dominated by North American credits, and almost exclusively by financial sector issuers, be they banks, insurers, auto loan financiers or diversified financial institutions.?
Aside from the dominant US presence, Tarn also notes that Poland has successfully continued to build a yield curve in the Samurai market, and that a few other sovereign or government linked entities, such as Korea Development Bank, have also issued.
Tarn observes that the market's growth in 2004 over 2003 is based on a number of factors. ?First,? he says, ?the domestic corporate bond market has seen little or no growth since about 2000. Second, as one would expect from a nation with an ageing population, the pool of investment funds in Japan is growing, is still largely risk averse, and is focused more on income generation than capital growth, thus making it an ideal market for fixed income products ? particularly those which do not generate foreign currency exposure.?
?Third,? he continues, ?Samurai credits offer local buyers a reasonable credit spread premium over similarly or even lower rated credits in the domestic bond market, where spreads are razor thin. Finally, foreign credits have been benefiting from a lower cost basis swap since the middle of last year.?
Tarn explains that the effect of these factors, combined with the tighter absolute spread issuers now pay in Samurai format, mean that the deals are generally proving very cost-effective, and that on rare occasions sometimes even price inside levels these credits would pay in the dollar or euro sectors.
?The Samurai market has benefited from the low level of corporate bond issuance in Japan,? says Vince Purton, managing director at Daiwa SMBC Europe in London. ?Investors are therefore cashed up and looking for sensible credits that offer enticing spreads to JGBs.?
Two recent deals that fitted investors' needs precisely came from Credit Suisse Group and Samurai market stalwart Household Finance.
Credit Suisse Group in early October raised ¥85bn in a two tranche issue. Pricing relative to the local market demonstrates what good value foreign credits are for local investors. Credit Suisse, which is rated Aa3/A/AA-, priced its five year notes at 20bp over the five year swap rate while similarly rated Japanese corporate issues stand at around Libor flat to plus 5bp, while triple-B names are closer to plus 20bp.
Household Finance, a Samurai regular rated A1/A, in early September sold ¥60bn of five year notes at 27bp over mid-swaps through HSBC (Household's owner) and Mizuho Securities. The deal was initially sized at up to ¥25bn with price guidance in the 27bp-30bp range.
The sharp increase in size to Household's largest Samurai to date and the tight pricing underline just how much unsatisfied demand there is for Samurai paper.
?It is worth noting,? says Tarn, ?that the Samurai market is somewhat insulated from the rest of the world's capital markets, comprising as it does largely of buy-and-hold primary investors. That means that issuers are tapping into a totally discrete investor base and not in any way cannibalising their other investor markets.?
Eastern Europe visits Japan
The sovereign market has been dominated by eastern European names. In June, Daiwa and Nomura International completed a ¥50bn five year Samurai for the Republic of Hungary. Although this was the republic's debut Samurai, the country has a fine Samurai pedigree, the National Bank of Hungary having issued 28 Samurai and two Euroyen issues since 1987.
?Hungary's accession to the European Union in May 2004, its strong single-A credit ratings from all major credit rating agencies and the strong economic story contributed to the deal's success,? says Purton.
Hungary is rated A1/A-/A (Moody's/Standard & Poor's/JCR) and the deal was priced with a 1.09% coupon to yield 16bp over yen Libor. ?The deal was launched into choppy conditions,? recalls Purton, ?but the success is testament to Hungary's strong standing in Japan and to its excellent story. That was borne out as most orders were from new takers of Hungarian risk, but we also saw plenty of demand from clients who were previously active in National Bank of Hungary Samurai bonds in the 1990s.?
The leads initially expected demand to be focused on leading Libor-based accounts and these were indeed strong buyers of the deal. But a market sell-off in the days before the launch dragged yields upwards and the issue received much stronger than expected regional demand, notably from Shinkin banks (local co-operatives). ?This category of buyers tend to look at Samurais more from an absolute yield basis,? says Purton. ?As these orders grew, we were able to tighten in the terms.?
The transaction had been telegraphed well in advance and duly received close attention from the market. ?It was a unique deal,? recalls Purton, ?being both a debut deal from a single-A rated EU sovereign but at the same time a return of a much-loved market favourite from the 1980s and 1990s, albeit under a new name. Name familiarity and market loyalty are ranked highly in Japan and Hungary scored top marks.?
Daiwa teamed up with Nikko Citigroup in late May to sell a ¥50bn five year Samurai for the Republic of Poland. The deal followed the debut ¥25bn seven year issue of 2003. At double the size of the sovereign's debut, the deal matched the largest institutionally targeted issue ever from the central European region. It was Poland's first issue since the republic and nine other countries joined the European Union in May.
The bonds were priced on a coupon of 1.02% to give a spread at re-offer of yen Libor plus 30bp mid-swaps. That resulted in pricing flat to Poland's euro curve, which at that time for a June 2009 issue stood at 35bp over Euribor, or 30bp over yen Libor.
?The five year maturity appealed to a broad range of investors, and is therefore a good strategic move for Poland, which is focused on diversifying its investor base,? says Purton. ?We visited a large number of accounts in Japan and Singapore and were able to attract a wide and diversified group of accounts. It was well telegraphed to the market in advance and was seen as a high profile must-buy issue.?
There was a healthy split between regional and Tokyo accounts. The result was orders from around three times the number of accounts that bought into the first issue, with many new names as well as good repeat orders from the 2003 investors. ?That said much about the current liquidity for Samurai issuers,? says Purton.
With a five year issue this time, complementing the 2003 seven year issue, Poland broadened and deepened its access to core Japanese accounts. ?A sovereign credit such as Poland sees the domestic yen market as a worthwhile diversification from the euro,? adds Purton. ?Poland's overall funding needs are such that this is a wise strategy and its new footprint in the market bodes well for future returns to the yen sector.?
Looking at the cost of funding and the documentation requirements to issue in Samurai format for those credits without a shelf registration, Tarn says that despite the attractive pricing available in Samurai format, the most compelling reason for foreign credits to tap the market is diversification. ?Poland is one of the most interesting examples of this theme in recent times,? he explains. ?They have enjoyed considerable success at improving awareness across the landscape of Japanese investors and have begun to establish a visible, consistent and liquid credit curve.?
Autos dominate corporate credit
On the corporate front, a ¥30bn three year issue for Ford Motor Credit Company in May was its first Samurai deal since a retail targeted dual currency issue in 1996. Purton explains: ?This deal was the first Samurai of 2004 placed mainly with individual investors, although being carefully priced it also generated significant demand from corporate and smaller financial institutions.?
The 1.32% coupon and 94bp yield above yen Libor attracted strong investor interest in the low yield environment while also achieving a very aggressive funding cost for the issuer.
The ubiquitous General Motors Acceptance Corp also opted for a Samurai issue, raising ¥70bn in a two tranche, fixed and floating rate issue in early June. The ¥60bn three year tranche was priced at par with a coupon of 1.34% through joint leads Mitsubishi Securities and Mizuho Securities, underlining how competitive the arranger market has become with the growing power and presence of the securities' arms of the mega-banks.
GMAC, with a rating of A3/BBB, was somewhat of a rarity as deals from triple-B rated borrowers are few and far between in the Japanese corporate bond market. However, GMAC's single-A rating from two domestic ratings, combined with its household name recognition, helped improve domestic investor confidence.
For this issuer, the pricing of the three year tranche at 92bp over yen Libor was seen as attractive by local investors ? the credit curve in
Purton believes that the Japanese investor market is ?almost hermetically sealed? from the rest of the world. ?For example, the investors that bought into the Poland issue would not be buying Poland's credit in other currencies.?
The Samurai market remains a short to medium term funding option. ?Japanese buyers do not favour duration risk, but at the shorter end of the curve the Samurai market offers issuers a different investor base and competitively priced funding,? says Purton. ?This makes it a valuable source of peripheral funding for credits such as Poland and Hungary.?
On a less positive front, the Samurai market continues to be hampered by the regulatory set-up which requires a lot of paperwork but then gives only a short window for issuance after the filings.
For example, the Samurai market lost out this year when BMW Finance opted for the Euroyen market for its ¥30bn issue. The offshore yen market has offered issuers an alternative in recent years, for example the noteworthy HBOS subordinated issue of 2003.
?Euroyen transactions from GECC and BMW this year also confirmed the appetite for corporate credits in Euroyen, with BMW choosing that sector as it is more flexible and offered more rapid execution than the Samurai market, where they had issued in 2002,? says Jonathan Minor, joint head of debt origination at Daiwa SMBC Europe in London.
Samurai competing for attention
To redress some of the Samurai market's disadvantages, the Japanese authorities have made some concessions. Sam Amalou, executive director at Daiwa SMBC Europe in London, explains: ?Corporates can now qualify for shelf registration in Japan on the basis of their credit rating rather than a listing on the Tokyo Stock Exchange, so that has improved matters.?
There is also talk that Japan will launch English language filing from January 2007. ?That would be a major step forward, as the process for foreign issuers to translate accounts into Japanese is extremely cumbersome and, of course, expensive,? says Amalou.
Japan is so flat that a triple-B credit in the local bond market would be pricing at least 30bp inside that level. Yet for GMAC, the bond would have swapped out to where its equivalent dollar bonds were trading.
GMAC had launched a ¥33bn 1.29% four year Samurai in November 2003, but that was a retail targeted bond, whereas this deal was aimed at a broader range of institutional and retail buyers. For example, asset managers constituted over 50% of the three year tranche in the latest bond, but there was also interest from regional investors and Shinkin banks. The smallish two year tranche gained demand from regional and city banks.
The first corporate Samurai deal of the year, and the biggest, came in May, when GE Capital sold ¥105bn of bonds in a two tranche deal, through joint bookrunners Mitsubishi Securities and Mizuho Securities.
KDB joins the party
No year is complete in the Samurai market without a Korean issuer or two. Just before GMAC launched its deal, the A3/A- rated Korea Development Bank (KDB), the state policy bank, priced what was considered an aggressive ¥65bn five year bond, its 22nd Samurai.
KDB started out with a ¥50bn deal and then increased it to ¥65bn, while marketing the issue at 39bp-43bp over yen Libor, a highly aggressive pricing level, through Mizuho Securities and Nikko Citigroup. The deal was priced with a coupon of 1.22%, or 43bp over yen Libor.
At that time, KDB's 2008 Samurai was bid in the low 40s over yen Libor, while its dollar 3.875% 2009 bond was trading at 62bp/53bp over dollar Libor, equivalent to 50bp over yen Libor.
The daring pricing from the leads was achievable in the end due to the Japanese corporate reporting season, during which a slow domestic bond market was even quieter than usual. Moreover, with spreads for Japanese credits so incredibly tight, the KDB issue still represented relative spread pick-up.
Moreover, Korea is an improving story ? KDB's 2008 bond had been first priced at 77bp over yen Libor in June 2003.
US issuers jump in
The Samurai market in 2004 has also been characterised by robust issuance from US commercial and investment banks. Many of these issuers have a Samurai shelf registration and therefore enjoy execution flexibility.
It was only in April 2003 that Japanese regulators changed the rules to allow companies not listed on the Tokyo Stock Exchange to file for shelf registrations. The change means foreign borrowers no longer have to make time-consuming filings every time they want to launch a bond.
This change has helped some of the US investment banks to slip quickly into the market when they spot opportunities. While the Samurai market offers low cost yen funding to such credits for their Japanese expansion, especially in the area of principal finance, from a Japanese investor's point of view, the deals offer spread pick-up over comparably rated domestic credits.
In the same weeks as GECC had sold its jumbo issue in May, Goldman Sachs raised ¥100bn in a two tranche, five and 10 year self-managed issue.
Merrill Lynch is one of the regular names in the Samurai market. It sold a self-managed ¥45bn issue in mid-June amid rising volatility in the Japanese government bond (JGB) market. Merrill had also tapped the market for ¥55bn in February.
The self-led issue appealed to domestic investors who had been starved of domestic corporate supply. The level of interest allowed the US investment bank to increase the issue size from initial plans of ¥30bn.
A ¥45bn Samurai at that time was a big deal, but the lack of supply in the corporate bond market and the dominance of issuance in that market by semi-government issuers at extremely tight spreads to JGBs encouraged buyers to turn to the Merrill paper for yield pick-up.
The deal was priced at par with a 1.23% coupon to yield 19bp over yen Libor, about 1bp tighter than the earlier Samurai deals of peers such as Goldman Sachs and Morgan Stanley.
For Merrill, the bond also offered an appealing funding arbitrage. Many of the US banks and securities houses have this year been issuing Samurai because they offer funding diversification at attractive levels. The issue was also roughly in line to slightly tighter to where it could have raised dollar debt.
In the same week, JP Morgan Chase, rated A1/A+/A+, raised ¥55bn in a three tranche deal, which was also self-managed.
Optimism for 2005
Most participants believe the prospects for the market are good. ?If interest rates rise in Japan,? says Purton, ?there will certainly be greater retail interest, which is coupon focused. Meanwhile the insurance company investors are more and more active in yen as opposed to foreign currencies and will continue to provide a solid base of spread-focused investors for the single-A and above credits.?
Kensey Green, director of the fixed income syndicate at Nomura International in London, is encouraged by the demand and the opportunities for issuers, but realistic about the likely supply. ?The Samurai market is characterised by plenty of demand but not enough issuance,? he says.
Nevertheless, there will continue to be a solid platform of credits that have a commitment to the Samurai market, such as Household Finance Corp. ?Like Poland,? says Tarn, ?this is another outstanding example of a borrower which has systematically built its name recognition in the Samurai market, and which is now reaping the rewards through larger deals and improved price tension.?
With Japanese investors starved of spread and so eager for deals, with benchmark spreads in the domestic corporate bond market so low, a host of potential issuers will no doubt be thinking seriously about the Samurai market. Counted out some years ago, the Samurai is far from a spent force.