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Yen markets: a premier source of diversification

Over the last three decades, few of the world’s capital markets have acted as a more consistent and dependable source of funding diversification than the yen bond market, especially the Samurai sector. By Philip Moore.

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The big strength of the yen bond market, according to Vince Purton, managing director at Daiwa Securities in London, is the large, captive and loyal Japanese investor base. “As long as Japan remains one of the largest capital markets in the world, it will be a key part of borrowers’ overall debt management strategies,” he says.

The Samurai bond market’s credentials as a diversification tool have been especially valuable in tough times — the aftermath of the subprime crisis, for example. “While many issuers were struggling to fund in most global debt capital markets, the Japanese market showed its resilience, with a number of established international issuers successfully funding through the crisis,” says Masaya Mizobuchi, head of global debt capital markets at Mizuho Securities in Tokyo.

While yen funding has been welcome for international borrowers, the Samurai market has also evolved into an increasingly diverse alternative for local investors. “What started off as very much a sovereign market was then opened to a fairly select group of names from the financial services industry,” says Purton. “Today, it is accessible to a much wider and more geographically diverse range of borrowers, with a healthy stream of debut issuers.”

Between 1987 and 2016, the share of triple-A issuance declined from 58% to zero. Double-A issuers dropped from 42% to 7% over the same period, while single-A names grew from nought to 61%. The share of those rated below single-A has risen from zero to 32%, mirroring Japanese investors’ pursuit of higher yields. 

A more recent development has been lengthening maturities. “Domestic investors have been adapting to the low yield environment by investing in longer tenors, expanding the credit universe and looking further down the credit curve,” says Mizobuchi. “We see this strategy manifesting itself in the Samurai market. For example, in financial year 2015, only 12% of total Samurai bond supply was in tranches longer than five years. In 2016, that share shot up to 60%.”

‘Notorious’ swap

The most significant recent influence on the credit profile of the Samurai issuers has been what Rabobank’s Kazuhide Tanaka, head of long term funding, Japan, describes as the “notorious” dollar/yen basis swap. Since 2008, when it first issued in Samurai, Rabobank has been the market’s most prolific borrower. It has also been one of the most influential and innovative, re-opening the market after the Lehman Brothers crisis and, later, opening the Samurai sector for Basel III tier two-compliant issuance.

“We continued issuing regularly up until 2015, when the widening of the basis swap began to make issuance punitive for higher rated borrowers,” says Tanaka. 

Spencer Dove, managing director of public sector DCM at Nomura in London, says this has not made the Japanese investor base any less relevant to SSA borrowers. “Japan is still an incredibly important funding market for SSA names, but as long as the basis swap stays this wide, they will access the Japanese base in US or Australian dollars, rather than in yen,” he says.

Clearly, a more favourable and a more predictable and transparent basis swap would support a return to the market for a borrower like Rabobank, and also other highly rated issuers that have effectively been shut out for several years. 

There are other frustrations which continue to hamper the efficiency and therefore the growth and diversity of the market. One is the requirement for documentation in Japanese, which borrowers say can be onerous for newcomers, but soon becomes routine.

A more serious constraint is the notoriously protracted issuance procedure. “If there is one aspect of the market which needs improving, it is the length of the official marketing period,” says Roland Charbonnel, director of group funding and investor relations at BPCE, the French bank that has been a pioneer in the Samurai market in recent years. BPCE issued its first Samurai in 2012, and in 2015 printed two tier two capital issues. In January, it sold the largest yen bond ever issued by a French bank, raising ¥143bn in a multi-tranche deal which included ¥70bn of senior non-preferred debt.

“In the dollar, euro and sterling markets, bookbuilding generally takes place within one day or even a couple of hours,” says Charbonnel. “In Japan, the standard period is four days. Within that period there can be any number of factors which may change the market completely.”

Others agree that the lengthy issuance procedure is a handicap. “I’d like to see the process become more efficient and issuer-friendly,” says Rabobank’s Tanaka. “This would start a virtuous cycle by making pricing more exact and transparent, attracting more issuers and therefore creating greater liquidity.”

Mizuho’s Mizobuchi says it is not regulations that slow down execution. “It is market practice that reflects the considerable time required to make investment decisions,” he says. “In most cases there is nothing to prevent an issuer from executing a transaction in a single day in theory, but this would be at the expense of forgoing investment tickets from rapid executions.”

Pro-Bond rival

However, the hoops through which Samurai issuers must jump have given rise to competition from the Tokyo Pro-Bond market, established by the Tokyo Stock Exchange in May 2011. Pro-Bond says it provides “more convenience to issuers, investors, securities companies and other market participants both in Japan and overseas”, in part by allowing for English language documentation and repeat issuance under MTN-style documents. 

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The success of Pro-Bond, which has already attracted new borrowers to the yen market from all over the world, may ultimately shake up issuance practices in the Samurai market.

“One would hope that if the Pro-Bond market continues to develop, the authorities and regulators will recognise the benefits for the Samurai market of copying some of the procedures which are commonplace in the EMTN market and are therefore applicable to the Pro-Bond alternative,” says Purton. “The fact that there is a domestic competitor in terms of format is encouraging.”

If the Samurai market were to adopt some of the more streamlined issuance mechanisms of Pro-Bonds, it does not necessarily follow that the Pro-Bond initiative would be stripped of its competitive appeal for new or infrequent borrowers in yen. “Technically, transactions under Pro-Bond are deemed to be private placements, so the difference between them and Samurai bonds is not just related to execution risk,” Purton adds. “There are also a number of other fundamental differences between the two markets.”

While a more straightforward primary market may be one feature of the Samurai market’s development, another may be the continued expansion of the investor base in Japan.

“We are now selling Samurai bonds in all 47 prefectures,” says Purton. “But there are still many small regional financials that have yet to diversify into overseas credits, so there is plenty of untapped demand to be explored among regional investors in Japan.”

Qualitatively, as well as quantitatively, the Japanese investor base is changing. Their understanding of risk is second to none, say bankers. 

One indication has been the success with which bank borrowers such as BPCE have targeted the yen market for regulatory capital. “The way the Japanese have enthusiastically embraced French senior non-preferred issuance suggests that we could see a healthy pick-up in overall numbers,” says Purton. “As they’re increasingly happy with the concept of non-preferred senior assets, they will be interested in a wider geographical balance of such risk over time. So I would expect to see more issuance of this type of debt in the Samurai market as other markets follow France, and indeed more investment in all other types of TLAC issuance too.”

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