The Japan Bank for International Co-operation (JBIC) has been both aggressive and innovative in its international borrowings this year. In its earlier guise as the former Export-Import Bank of Japan (Jexim) it reopened the international markets for Japan's government guaranteed issuers (JGGIs) in early February with an innovative $1bn five year floating rate note.
Then, in its new incarnation as JBIC (a combination of Jexim and the OECF (Overseas Economic Co-operation Fund), the bank raised $1bn in the 10 year fixed rated Eurodollar market, priced at 91bp over Treasuries.
The significance of February's successful FRN cannot be underestimated. At that time, sentiment towards Japan was still largely negative. But Jexim and its lead bank, Paribas, had noticed that the traditional central bank and multilateral floating rate investors had an appetite for zero risk weighted sovereign paper.
Supply of European sovereign debt has been on the decline and these investors were prepared to take the very marginal gamble on Japan in exchange for a re-offer spread of 5bp over three month Libor.
The blow-out success of the transaction catapulted Japan back to the forefront of international investor consciousness just in advance of announcements that the economy was finally improving, and just before foreign investors started aggressive buying of the stockmarket.
Jexim's bold FRN single-handedly repriced Japanese debt and opened the door for the other government-guaranteed names that have steadily tapped the markets throughout the year.
Euroweek recently met Yasuo Hirota, director in the capital markets division at JBIC in Tokyo, to discuss the achievements of the year to date and the outlook for the year ahead.
Q: What is the significance to you of the $1bn FRN in February?
We would like to think that it was timed extremely well to coincide with the turning tide of investor sentiment towards Japan. Frankly, there were some risks attached and we were conscious of the consequences had we failed to secure such an emphatic vote of confidence.
The lead manager, Paribas, had identified the types of investors that not only wanted zero risk weighted assets but that were already slightly more sympathetic towards Japan's nascent recovery.
These were new investors for us and for Japanese government issuers and as such they had not suffered the downgrades of paper in their portfolios over the past years or so. We opted for a large issue because these investors need volume and liquidity. It was the largest Japan's government guaranteed bond ever, and was the first FRN for a JGGI.
It is worth recalling that the deal surprised the market. The issue, which performed extremely well, also had the effect of pulling in spreads on all JGGI paper in the international market and certainly helped pave the way for the return of 'Japan Inc' in force.
Q: Zaito funds (low cost funds disbursed by the Ministry of Finance's Trust Fund Bureau) are likely to be scarcer next year. What plans do you have to cope with that?
This issue is still being discussed by the government. With regard to the restructuring of the zaito system, we are carefully following these developments. As the only JGGI that needs dollar funds, we consider our access to the international markets quite important. Though we are permitted to issue in the domestic bond market under the relevant laws, at the moment we do not have any plan to tap that market soon.
Q:What plans do you have for the rest of the fiscal year?
If there should be funding needs, we will fund up to approximately $500m in the international market for this fiscal year which ends next March.
Q:Did your $1bn Eurodollar fixed rate issue in mid-October achieve what you wanted?
In this offering, we aimed at achieving investor recognition of our new name as well as consolidating our fully fledged benchmark bond status. The aim was achieved by the fact that the bond was sold to a broad spectrum of prime investors in the world. It was launched at 91bp over Treasuries, has performed well in the secondary market and is outperforming the market in terms of contraction of spreads.
In the good old days of early 1997 and before, our spread differential was in the single digits against benchmark issuers such as the EIB whereas we are now around 15bp-25bp over. Certainly our hope is to go back to these old days although it is somewhat out of our hands while the country's rating is split and until Japan proves that it has turned the corner and government indebtedness begins to fall again. At least we are moving in the right direction - investors clearly believe that Japan risk is improving.
Q:Was it your plan to set several benchmarks for the year?
The first deal for this fiscal year (a five year issue in June) was perhaps more opportunistic and the market conditions were difficult, so we therefore approached the deal in a more conservative manner, expecting only to obtain around $500m.
In the end we managed to set a new large and liquid benchmark.
The second deal in Eurodollars (10 years in October) was certainly an attempt to issue a benchmark to set a new fixed rate price. Though we understand the strategic importance of setting a benchmark in the euro sector as well, our ability to tap that sector depends on the market conditions.
Do not forget that our need is for dollars and at the moment the swap cost adds too much to the pricing.
Since we have an annual funding programme that is not as extensive as the EIB or World Bank, that means that investors are looking for liquidity and frequent issuance would be better. Therefore we want to try to satisfy the regular issuance requirements in volume.
Q: What is your view on the split rating?
We look at this on a simple basis. It is same as for the Japan sovereign. We understand the viewpoint of the agencies but we think it is totally unrealistic that the world's largest creditor could default.
Q:What are you doing to improve communication with investors?
I would like to improve our relationship with investors. We made a Bloomberg roadshow to investors for the first time for our latest deal. That is a new step for the bank in its use of new technology. Neither we nor investors need to spend too much time or money and investors can see the presentation whenever they want.
Q:What is the key to your strong relationship with both Paribas and Goldman Sachs?
We have strong relationships with other many houses. Our criteria for the syndicate members are largely their placement power, quality of proposals, commitment to the issue, and information.
Some of the powerful houses do not concentrate their resources on us and such houses cannot provide us with high quality service. As an issuer our direct interface with intermediaries' staff overseas is vital, but they also need to have a quality relationship person in Tokyo to interface between our bank and London.