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Japan in the Capital Markets Sept 2021

International yen bonds face uphill battle

The international yen bond market has perked up this year, but deal volumes are still far below pre-pandemic levels — raising questions about what will happen next for global borrowers funding in the Japanese currency. By Rashmi Kumar

When it comes to yen-denominated bonds sold by international issuers, a lot can change in the span of a year. In the eight months to end of August 2021, non-Japanese borrowers had raised about $9.9bn-equivalent through 85 bonds denominated in yen, across the Samurai market, the Euroyen market and the global yen market, according to data from Dealogic.

In comparison, during the same period last year, volumes were lower at $8.7bn from 58 transactions. Deal flow so far this year is already nearing the full-year activity in 2020 worth about $11.6bn.

A key reason for the lower deal flow in 2020 was the favourable conditions in borrowers’ own domestic markets, say debt capital market bankers in Tokyo.

“At the time of Covid-19 last year, the frequent issuers in the international yen bond market focused on their home market currencies,” says Kazuma Muroi, executive director at Mitsubishi UFJ Morgan Stanley Securities’ debt syndicate team in Japan. “As a lot of central banks offered support through quantitative easing, companies could enjoy strong conditions in their own currencies.”

In the US, the Federal Reserve slashed interest rates in March 2020 to almost zero, and stepped up its purchase of government and corporate bonds to prop up the economy. It also launched a $700bn stimulus programme to revive economic growth, but Fed chairman Jerome Powell did hint at the end of August that the central bank could begin withdrawing some of the stimulus this year if growth rebounds and inflation returns to the target of 2%.

In Europe, the European Central Bank has also unveiled large-scale stimulus measures in the past year, including big asset purchases.

The Bank of Japan has also put in place a long-running stimulus package. In a note in early September, analysts at UOB said they did not expect the BOJ to tighten anytime soon, and expect it to maintain its “massive stimulus” for the next few years, possibly at least until the 2023 financial year.

But the need for corporations to remain in their home markets for funding started to shift in 2021. Amid attempts to get businesses back to normal and diversify funding sources, the yen became one of the go-to currencies for borrowers.

That explains why a host of European, Asian and US issuers returned to the Japanese yen bond market for fundraising this year.

The two largest deals came from Warren Buffett’s Berkshire Hathaway, which bagged about $1.5bn from yen bonds in April, and French automaker Groupe Renault, which took about $1.4bn this year. Issuers from Asia have included the Indonesian and the Philippine sovereigns, which raised about $920m and $500m, respectively.

Other high-profile deals have come from BNP Paribas, which tapped the yen market for just over $800m, French investment holding company SAS Rue La Boétie ($929m) and US insurance company Aflac ($749m).

The main interest international issuers have is around the cost differential between selling a yen deal and a bond in their local currencies, says Hiroshi Oikawa, head of Japan DCM syndicate in Bank of America’s Japan global capital markets team.

“As most international borrowers swap the proceeds into their local currencies such as dollars or euros, we can’t perfectly predict the swap rates with yen,” says Oikawa. “Some issuers may be paying up versus their local currency markets, but if the spreads are still appealing, yen offers an opportunity for issuers to diversify their investor base and their funding currency.”

Naoyuki Takashina, co-head of international DCM at Nomura, adds that FIG credits, in particular, can get tighter funding costs in local currencies versus yen-denominated bonds. But he adds that while local costs are “hard to beat”, the yen levels are relatively in line with what can be achieved in the local market.

“Some of the FIG issuers didn’t price through their euro curves but the premium was modest,” reckons Takashina. “So they find value in keeping a diversified funding source.”

Yen options 

There are various ways by which global issuers can raise yen funding, but the main avenues used are the Euroyen, global yen, Samurai or Pro-bond formats.

Euroyen bonds are yen deals issued in the Eurobond market by non-Japanese borrowers, while global yen bonds are denominated in yen but printed internationally. Unlike Samurai bonds, these deals are not registered with the Tokyo Stock Exchange and do not require the issuer to print their documents in Japanese — making them faster and easier to execute.

Pro-bonds give international issuers access to Japan’s domestic investor base, but bar retail investors from buying the notes. Issuers can disclose their documents in English and/or Japanese, allowing for easier execution.

But increasingly, borrowers are making their preferences clear: dismissing Pro-bonds outright, sticking to Samurai in some cases, while leaning more towards the Euroyen or global yen markets.

In 2018, for example, of the $29.4bn raised in the international yen bond market, nearly 65% was taken from the Samurai debt market, about 29% from the Euroyen market and nearly 6% from the global yen market, shows Dealogic data.

The proportions have shifted since.

In 2019, some 49% of the $29.6bn in total yen volumes came from the Samurai debt market, while the Euroyen market accounted for about 29% of the international yen deal flow and the global yen market took about 21%.

Last year, Samurai volumes totalled 38% of all international public yen bonds, followed by the Euroyen market at close to 30% and the global yen market at about 23%.

By August-end this year, the gap had narrowed further. Samurai bond volumes formed 41% of the international yen bond volumes, followed by the Euroyen market at 31% and the global yen market at 28%, shows Dealogic.

“Issuers have more options now,” says Oikawa at Bank of America. “For quicker execution, you go to the Euroyen or global yen formats, and for incremental orders, you can choose Samurai.”

MUFG’s Muroi adds that just a few years ago, many investors in Samurai bonds couldn’t buy Euroyen bonds, keeping them focused on the Samurai market. But when high-profile issuers like Apple and Walmart issued global yen deals, a rapid shift of the investor base was seen.

“They had to accept Eurobonds quickly,” says Muroi. “And now a big chunk of the market is more of non-Samurai bonds. But Samurai bonds will remain important among issuers that have a shelf registered already, so they can come back to reach out to broader investors in Japan compared to other formats.”

But access to the yen bond market — be it in any format — comes with some caveats. Only the better rated issuers are welcome. A conservative investor base means only borrowers with at least a triple B rating or higher can tap yen bond investors. “We don’t have a sub-investment grade market in Japan,” says Muroi.

At the triple B level too, investors tend to show preference for short tenors, but that mindset can change depending on the credit and the industry of operation.

Bankers say there is some pressure among investors to go lower down the credit spectrum — especially as the low-rate environment makes fund managers even hungrier for yield — but the acceptance is still largely limited.

“Investors’ spectrum of credit acceptance remains broadly unchanged,” says Takashina. “They are not yet going to the single-B space, but remain comfortable at the triple-B level.”

There have been other changes in investor behaviour, however, given the disruptions caused by the Covid-19 pandemic on the traditional way of doing roadshows for transactions. Borrowers and investors in Japan — like their global counterparts — have had to rapidly adjust to virtual meetings and marketing.

Nomura’s Takashina says banks and investors have been able to adapt to using technology, be it a simple conference call or a video call, to communicate, offering a level of flexibility not seen before.

Some debut issuers may balk at attempting to sell a deal without holding face-to-face meetings with investors in Japan, but Takashina reckons there can be benefits to doing virtual roadshows for maiden transactions.

“Imagine if you’ve booked your flight tickets and hotel for a few days, but you’re going to travel all the way without knowing how many investors are going to turn up to see you,” he says. “So virtual roadshows can be helpful there.”

Libor transition 

DCM bankers and investors in Japan are slowly but steadily readying for the rollback of dollar Libor at the end of the year, and as a result the yen Libor. Progress has been somewhat slow so far.

Bankers say that a handful of issuers selling callable notes are using the Japanese government bond rates to reset spreads. For example, in May, BNP Paribas sold its first Samurai bond that doesn’t reset to Japanese Libor, but will instead reset to a spread over the Japanese government curve.

The Tokyo interbank offered rate (Tibor) is still used domestically, while the Tokyo overnight average rate (Tona) has been highlighted as the successor to Libor for yen deals.

There is no domestic precedent yet for using Tona, but there may soon be one. Mitsubishi Corp was planning to sell a floating rate note benchmarked to Tona in mid-September, as GlobalCapital was going to press. The deal will be the first public bond tied to the replacement for the Japanese yen Libor.

Nomura’s Takashina reckons when the market for international yen bond reopens, the bank will pitch more issuers to use the new Tona swap rates.

“Things are moving in the right direction, but the market needs to become quickly focused on adopting the change to a new benchmark,” he adds. s