According to Morifumi Yotsumoto, managing director and head of debt capital markets at Barclays in Japan, in the calendar year to early August, total international issuance from Japanese borrowers amounted to almost the same as the whole of the previous year.
Of this total, roughly half was accounted for by bank borrowers, which on the face of it, may appear puzzling. After all, Japan’s leading banks are very well capitalised, are swimming in deposits and enjoy highly competitive funding costs in the domestic market. “The Japanese banks could easily raise inexpensive yen and swap it into dollars,” says Daisaku Fujikawa, co-head of capital markets origination at Citi in Tokyo. “But they don’t want to use up swap lines.”
Fujikawa adds that the banks have been stepping up their international funding both to diversify their investor bases and to support their fast-growing overseas lending business. In the year to the end of March 2013, while domestic lending at the big three banks rose by a tepid 1.1%, according to a recent Deutsche Securities report, overseas lending leapt by 27.6% at MUFG, by 32.5% at SMFG and by 31.5% at Mizuho. On a local currency basis, Deutsche is forecasting growth in overseas lending of 10%-15% in 2013/14.
Among the megabanks, SMBC has been especially active in the international market this year, issuing in a range of currencies. “Each megabank has a similar agenda in the international market, but SMBC has been the clear frontrunner,” says Fujikawa.
SMBC kicked off its international funding for this calendar year in January, when it issued a three-tranche $2bn transaction, made up of a $750m 10 year bond at 117bp over US Treasuries alongside a $750m three year tranche at 58bp over and a $750m five year tranche at 77bp over.
The bank built on its investor diversification initiative in March with its first sterling transaction for several years, a £250m three year transaction led by Barclays, RBS and SMBC Nikko. Priced at 55bp over Libor, the SMBC sterling deal was placed largely among investors in the UK (which accounted for 58% of distribution) and the Middle East (24%).
European adventure
More recently, towards the end of July, SMBC made its first senior unsecured transaction in the euro market, with a €500m 10 year issue led by Citi, Deutsche, Goldman Sachs and SMBC Nikko. The transaction was priced at 98bp over swaps, and generated total demand of €850m, with just over 80% of the bonds placed in Europe. “The timing of the euro transaction was especially interesting because SMBC usually issues in the domestic market in July, but chose to issue euros in preference to yen, which reflects its commitment to diversifying its investor base,” says Fumio Matsuda, executive director at Nomura Securities in Tokyo.
SMBC’s most striking transaction of this fiscal year, however, was its four-handled $2bn trade via BAML, Barclays, Citi, Goldman Sachs and SMBC Nikko in July. Although this was SMBC’s seventh senior US dollar transaction since July 2010, it was the first time it had issued a four tranche issue. The choice of two $500m tranches (for three and five years) alongside a $700m 10 year piece and a $300m three year FRN allowed SMBC to build on its strategy of further diversifying its investor base.
All three fixed rate tranches were priced well below initial guidance, at 85bp, 115bp and 140bp over US Treasuries for the three, five and 10 year bonds respectively, versus original guidance of 100bp, 135bp and 155bp. With a total book of $11bn, pricing on the five year tranche was flat to SMBC’s secondary curve, while on the three and 10 year tranches the new issue concession was in single digits, according to Goldman Sachs.
Debut issuers
The successful transactions from the megabanks was followed in March by a debut dollar deal from Sumitomo Mitsui Trust Bank (SMTB), which added to the diversity of Japanese FIG issuers in the international capital market with a $650m five year trade. Led by Citi, Goldman Sachs and JP Morgan, with BNP Paribas and Deutsche Bank acting as passive bookrunners, the SMTB issue was priced at the mid-point of guidance, or 105bp over US Treasuries.
Another newcomer to the international capital market from the Japanese financial services industry this calendar year was Sompo Insurance Company, which in March launched a rare $1.4bn issue of subordinated capital led by JP Morgan, Mizuho, Morgan Stanley and Nomura. “I think the trend of more hybrid issuance from insurance companies will continue,” says Shintaro Mori, co-head of capital markets and treasury solutions at Deutsche Securities in Tokyo. “Like the banks, these companies are writing new business outside Japan and need to match assets and liabilities. Additionally, the banks are no longer able to lend to insurance companies on a subordinated basis because of the high capital charges these loans would attract.”
Views appear to be mixed on the prospects for issuance of bank debt outside the senior market. “I wouldn’t be surprised to see some new tier two Basel III-compliant issuance from Japan,” says Mori.
The view is shared by a number of other Tokyo-based bankers. “I believe a number of the megabanks are considering subordinated and capital issues,” says Kentaro Kiso, head of Asia Pacific fixed income syndicate at Barclays. “Basel III is slowly reaching Japan’s shores and I would expect a new collection of tier two and additional tier one capital raising in Q4 and Q1, as well as a first round of issuance from Asian banks.”
Mori adds that there would be no shortage of local or international investor demand for Basel III-compliant securities from the leading Japanese banks, especially from Asian private wealth managers, which have historically had a voracious appetite for European bank capital. After all, says Mori, the robust capitalisation of the top banks have ensured that discussions about bail-in and point of non-viability (PONV) have been conspicuous by their absence in Japan. The obvious flipside is that with the cost of senior funding so low, Japanese banks have little if any incentive to issue more expensive subordinated debt.
Covered bonds needed?
If there is little need for Japanese banks to explore instruments such as Cocos, there is even less incentive for them to push for Japan to enter the global community of covered bond markets. Although the Development Bank of Japan (DBJ) has been pushing for the passage of legislation allowing for the issuance of covered bonds, its enthusiasm does not appear to be shared by others within the Japanese financial community. “The FSA unfortunately has other priorities at the moment,” says Yasuhiro Matsui, director of the treasury department at DBJ’s Tokyo headquarters. “We think it will take three to five years before we have covered bond legislation in Japan.”
It is easy to see why covered bonds are likely to remain on the back burner for Japanese borrowers and investors alike. As Deutsche’s Mori says, with banks paying 8bp-10bp over JGBs for senior five year debt, few will want to channel resources into setting up a programme allowing them to issue covered bonds that will only be able to shave a few basis points from the cost of their unsecured financing.
For investors, meanwhile, the returns on covered bonds are scarcely likely to be enticing given the credit work they would be required to put in. “Investors have very strict guidelines they are required to follow in analysing credit,” says Hiraku Kusaka, executive director of international syndicate and debt origination at Nomura Securities in Tokyo. “Few would have the resources to analyse the several thousand loans that may be embedded in a cover pool.”