from the deep sub-Libor funding that structured trades targeted at Japan can offer.
ISSUERS TARGETING JAPAN often have a long association with the country, and historically it has been tough for new issuers to break into this key investor base.
But if an issuer is well known, and well liked, Japanese investors tend to be willing to pay a premium for its paper. However, it tends to be only the highest rated issuers that can achieve these levels.
"Japanese insurance companies usually resort to buying sovereign and sovereign-related issuers," says Richard Tynan, director of Euro-MTNs at Lehman Brothers.
There remain many - particularly higher rated - issuers whose investor base for MTNs is chiefly from Japan. In the most part, they sell their securities in the form of structured deals.
"We have never been so active in the structured MTN market as now," says Per Åkerlind, treasurer at Swedish Export Credit (SEK). The Swedish agency has borrowed $3.2bn overall in 1999, around $2.8bn of which has been off the Eu15bn MTN programme which SEK uses as its principal documentation shelf.
Åkerlind estimates that at least 75% of this year's borrowing has been structured, and that about three-quarters of its structured borrowing has been sold to Japanese institutional and retail investors.
For SEK, the most popular form of debt requested by institutional investors have been Bermudan callable power reverse dual currency notes. Japanese investors have a long-standing link with Nordic issuers - SEK's relationship with the Japanese market, for example, goes back two decades.
So what accounts for the demand for SEK's paper? Åkerlind explains that it is a result of the fact that "we have proven consistent in what we are doing. Profits have been even year on year, there have been no surprises and we are extremely risk averse. This allows us to get long term financing from Japan."
SEK is rated Aa1 by Moody's and AA+ by Standard & Poor's for its foreign currency borrowing.
Because Åkerlind sees large, liquid benchmark transactions as the "name of the game" for the European investor base, Japan has becomes relatively more attractive for an issuer such as SEK. "It is not cost efficient for us to issue the larger transactions at the moment," he says.
The European investor base has not always been the chosen port of call for Toyota Motor Credit Corp. "We haven't seen much investor demand from the European market - in fact, most of our trades are reverse enquiry from Japanese investors," says Jean Liao, funding manager at TMCC.
It is not a situation that Liao is necessarily comfortable with. "While Japan is a good source of investors, our objective is to broaden that base and look to Europe," she says.
That may be tough, as Liao concedes that AAA/Aa1 rated TMCC does have the problem that "our targets are on the aggressive side.
In Europe investors are moving down the curve and looking at lesser-rated and higher yielding issuers."
TMCC has an international borrowing requirement of approximately $7bn a year. Most of its Euro-MTNs are privately placed deals.
"We have a Euro-MTN programme from which Eurobonds can be documented, but we don't consider public placements to be Euro-MTNs," says Liao.
As TMCC places what it considers to be MTNs on the basis of reverse enquiry, it is difficult to tell what percentage of its total borrowing requirement will be sold under that format.
As an indication, the Euro-MTN shelf has a potential to reach $16bn, although outstandings are currently around $11bn. But a large proportion of this shelf is made up of public deals.
Last year, TMCC sold $550m in Euro-MTNs and $3.4bn in Eurobonds. It also has a US shelf from which it issues domestic (US) MTNs and global bonds.
For TMCC, structured transactions are generally designed to enhance yield for investors. "The majority of our MTNs are callable transactions, step-up reverse floaters or reverse dual currency transactions," says Liao.
TMCC does not sell dual currency transactions as it has 50% principal protection as an internal requirement. Liao does not see as much demand for reverse dual currency deals as she does for other callable deals.
TMCC's favoured format is 10 year deals callable after one year, which have a high chance of being called. "The demand is more from small institutions," says Liao. "From their perspective they are getting a higher yield than issuing plain vanilla one year bonds."
DNIB is another issuer that sells a high proportion of its MTNS to Japan. For Japanese investors, 90% of DNIB's issuance will be structured, but the type of structure "depends on the flavour of the month," says Nicolette Kroon, funding and investor relations manager at DNIB.
"This year it has been reverse floaters and foreign exchange linked dual currency issues, last year it was power reverse dual currency bonds," she says.
Canada also has a long-standing relationship with Japanese investors. "Canada had been relying on its Canada Bills and Canada Notes (primarily US domestic targeted) programmes along with global dollar issues until they introduced their Euro-MTN programme to tap international demand," says Philip Pratt of the capital markets desk at Nomura.
"We completed a ¥50bn issue for Canada earlier this year which was driven through their asset/liability programme to provide for yen reserves. Canada does not borrow for domestic purposes in the international markets, using foreign markets for foreign exchange account purposes." However, Canada has been out of the market over the past nine months as its needs have been relatively small and its funding targets have been relatively tight. Some $3bn was outstanding on its $10bn Euro-MTN programme at the end of August.
EVEN FOR FREQUENT borrowers, keeping contact with investors is important - issuers that are in the market for the long haul need to maintain a constant dialogue.
SEK has tried to keep investors happy through offering to buy back bonds when necessary. "We have been buying back bonds, but it's much less now than in the past," says Akerlind.
"Several years ago there was a fall back in the value of the yen after its peak in 1996/97. We saw a certain recycling going on as investors went in and out of the bonds, but it was not because those investors were in trouble,"
Åkerlind says the crucial factor to maintaining access to Japanese investors is to support deals. "If you don't, you won't get the business in the first place," he says.