Big-name Japanese corporate credits are taking a hit in the yen secondary market as their operations in China – a major revenue stream – remain in limbo as the dispute for the Senkaku/Diaoyu islands continues. And to fill the void, investors are turning to Samurais issued by investment grade overseas corporates.
The Japanese brands that are most affected include electronic and auto companies with sizable balance sheet exposure to China.
Japan-based credit analysts tell Asiamoney PLUS that trading of these companies’ credit default swaps (CDS) in recent weeks has risen by dozens of basis points (bp).
The bankers explain that monitoring trading for CDS is the best indicator of investor appetite for Japanese companies’ debt because it is a more liquid market than that of longer-term bonds. And for Japanese companies, the results aren’t pretty.
“Globally the perception of these companies are doing fine, but in the Japanese credit market there’s a definite widening trend,” says one credit analyst at a Japanese bank. “Companies that are big into exporting to the Chinese market and do a lot of manufacturing there are facing obvious risks right now and there has been an immediate slowdown of their trading. Fundamentally it’s the electronic side of things that is not doing well, like Sony, Panasonic and Sharp and moment.”
Electronics giant Panasonic Corp. is among the affected companies, claiming 13% of its revenue pipeline from China in the 2012 fiscal year. “The price of its CDS rose 30bp-40bp to 260bp in recent weeks – which is a sizable difference for a company that has always attracted a lot of attention on shore,” said one credit trader.
Likewise, automaker Nissan Motor Co., which claimed 26% of its revenue coming from China by its financial year end in March, saw its CDS’ trading rose 25bp to 130bp.
The upward pressure has mounted since the middle of the month, when Japan purchased the uninhabited islands from its private owner. Not only did the move immediately threaten ties between the more-than US$340 billion trade partners, but it sparked a series of violent protests in the mainland outside Japanese government representative offices, manufacturing plants and brand outlets.
The protests prompted brands including Canon, Honda, Nissan, Panasonic and Toyota to temporarily close down onshore manufacturing plants.
Daisuke Fukutomi, an analyst at Standard & Poor’s (S&P) in Tokyo, explains that brand-name Japanese electronics and auto companies have been a cornerstone of the country’s corporate bond market, treating some of the country’s biggest brands as somewhat of a safe haven given their recognisable names and local roots. But as the credit quality of these companies has deteriorated – beginning long before the dispute began – it’s questionable whether these names will retain this status.
“The consumer electronic credits have been facing difficulties of their own even before this most recent China situation. Panasonic’s rating was lowered in the past 12 months, and Sony’s most recent downgrade has been in the last few days. And Sharp has its own unique problems – its rating has been lowered five notches in the past 12 months,” said Fukutomi. “Investors are beginning to look elsewhere now, and it will be interesting to see if buyers will still look to these names or foreign names, and whether or not these local companies’ advantage in the market will disappear.”
Traders of both Samurai and domestic credits explain that investors have already begun deciding with their feet. While Japanese corporate credits have encountered difficult times at home, investment grade debt issued by international brands have seen a pickup.
“As we’ve seen the credit of domestic corporations in the Japanese market deteriorate there’s been a shift to high grade debt issued by international companies,” said one Samurai trader. “There isn’t that much of this sort of credit in the market, but the few that have been issued have seen a pickup in the last month, almost directly when the prices of Japanese corporate credits began widening.”
Thirty-three bonds issued by international corporates remain outstanding in the Japanese debt market, and include debt sold by brands such as Renault, General Electric, América Móvil, Hyundai and Daimler.
As an example, the Samurai trader uses the three-tranche, ¥72.07 billion (US$928 million) bond issued by Walmart in July 2008.
“There’s been a huge demand for this debt,” says the trader. “This has caused trading to surge. We have been seeing Walmart’s bond trading at yen Libor plus 20-somewhat basis points, and now it’s trading in the negative numbers.”
Walmart is rated ‘AA’ by S&P, while the Japanese government is rated ‘AA-‘ by the agency.
The trader adds that the two-to-three-year bonds issued by high grade corporates, such as the ¥68.65 billion (US$884 million) bonds sold by General Electric in November 2011 and Renault’s ¥31.76 billion 2014 bonds sold in June of this year, are also seeing upside.
"General Electric's debt has tightened approximately 10bp since last month. It doesn't sound like much, but it used to trade around 40bp-50bp above yen Libor. That's a sizable move for a high grade credit," he said. "And even Renault, which isn't even high-grade, also saw its price tighten about 30bp-40bp."
General Electric is rated ‘AA+’ by S&P and Renault is rated ‘BB+’.
Further still, analysts and traders forecast that demand for this credit won’t dwindle for some time to come as the political situation between the two countries doesn’t appear to be cooling fast.
“This will be long-term political issue that’s not going away tomorrow, so foreign high grade issuers will be seeing more demand,” said the trader.
“This is not something that will be quickly resolved politically. Whether it will take economic sentiment to settle down before the political side does is a question but I don’t see that things will improve dramatically just in the next couple of months,” added Fukutomi.
However, despite the demand for these Samurai credits, dealers don’t expect many more corporates to rush into the yen market. Corporates, unlike sovereigns, will generally only issue yen-denominated debt if they have a need for the funding because the cost of funding is higher than selling bonds in other international currencies.
“If you’re an investment grade corporate you probably don’t need to pay much more than in the dollar market probably, but corporates aren’t like banks which issue Samurais to diversify their funding. You’d have to have a need for the yen to issue. That’s probably not too many companies right now that need to issue,” concluded the Samurai trader. “This is going to benefit existing credits in the market, rather than new entrants.”