Yen market proves value of diversity for global banks
Although the dynamics of the basis swap can make the yen market a volatile source of funding for international borrowers, the arguments for accessing it are compelling.
One of these is that the deep and liquid Japanese investor base gives overseas borrowers access to a diversified source of funding across a wide range of maturities. Another is that this investor base is hungry for yield, given that positive returns are increasingly elusive in the domestic market against the backdrop of the Bank of Japan’s negative interest rate policy (NIRP). That makes the yen market especially appealing for financial institutions with substantial TLAC and MREL funding requirements.
The GlobalCapital yen market roundtable brought together a number of borrowers from the FIG sector to discuss their funding strategies in the Japanese market, and to exchange views on its prospects.
Participants in the roundtable were:
Roland Charbonnel, director of group funding and investor relations, Groupe BPCE, Paris
Nadine Fedon, global head of funding, Crédit Agricole SA, Paris
Peter Green, head of public senior funding and covered bonds, Lloyds Bank Group Corporate Treasury, London
José Padilla, executive director, Daiwa Capital Markets, New York
Vince Purton, managing director, Daiwa Capital Markets Europe Ltd, London
Vincent Robillard, head of group funding, Société Générale, Paris
Kazuhide (Kaz) Tanaka, chief representative and head of long-term funding, Japan, Rabobank, Tokyo
Phil Moore, moderator, GlobalCapital
: Is it fair to say that this has been a challenging year for international issuers in the yen market, chiefly because the basis swap has not worked in their favour?
Vince Purton, Daiwa Capital Markets: It has been a challenging year in some respects, yes, but a positive one in others. And although it has been volatile, the underlying trend in the basis has actually been issuer-friendly.
Overall issuance volumes are much higher than in the comparable period of 2016, but down on the historically high numbers of 2014 and 2015 — so far at least. And within these numbers, we’ve seen good diversity between Samurai, global and Pro-Bond formats, and a surge in regulatory funding.
As always, the basis swap has played a part in terms of volumes and timings of issuance, particularly for some issuers looking at senior unsecured funding. Both the yen-dollar and yen-euro basis numbers are better now than we have seen in the past two to three years, and some rates have improved by as much as 30bp during 2017, depending on tenor and timing.
Of course there has been volatility in the level despite the improving trend, which has made the precise timing of issuance a difficult science. But what has made issuance equally challenging at times has been the spread tightening we have seen on secondary spreads globally which, even with a constant or improving basis swap, has produced for investors an historically low yen Libor equivalent spread on new issues. So the real challenge has come more from the historically low credit spreads generally, and less — at least compared with the recent past — from the basis swap.
: Kaz, staying on the subject of the economics of issuance, in years gone by Rabobank was comfortably the largest issuer in the Samurai market. But you’ve been absent from the primary market for a couple of years now. Is this purely a reflection of unfavourable economics in the swap market?
Kaz Tanaka, Rabobank: Our absence from the market has been due to a couple of reasons. One is a reflection of the unfavourable swap market, as you have mentioned. Over the past couple of years, our spreads have tightened while swap conditions deteriorated, which has created a double-hit in terms of trying make the economics of swap-driven issuance work for us. This has not only affected our bank, but almost all high grade issuers in the market. So this problem is not isolated and is a real barrier to making the Samurai market a truly viable alternative for benchmark issues. This is the biggest reason we have been sidelined from the market.
The second reason is our declining needs in senior, unsecured issuance. During the period from 2009 to 2011, we were issuing in excess of €40bn per year, but last year this fell to about €20bn and this year it will be €15bn. Factors such as a declining balance sheet, new issuance alternatives such as covered bonds, which we issued for the first time earlier this year, and partaking of TLTRO funds from the ECB has significantly changed our issuance profile in the Samurai market.
We are, however, maintaining our market presence in other ways, mainly through private placements for institutional investors driven by reverse enquiry. We are also active in the Uridashi market for retail placement, although our issuance there is not yen-denominated.
The Japanese market has historically been very important for us, and at one point yen bonds reached 14% of our total issuance. But redemptions and our recent absence from the new issue market have reduced this to about 6%.
Nadine Fedon, Crédit Agricole: Looking at the economics of issuance, in terms of preferred senior spreads over yen swaps, we are now at the tightest levels since we started issuing in Samurai format four years ago.
This year, due to the basis swap variation against euro-based issuers, some tranches have been priced at a slight premium to our euro curve at the time of issuance.
The premium over the cost of funding in euros has to be balanced against the advantages of accessing the Samurai investor base because it allows issuers to fund less frequently in other markets.
: Peter, what has attracted Lloyds to the Samurai market, where it has had a presence since 2010?
Peter Green, Lloyds: We have a good track record of issuing in both the Samurai and Uridashi markets. We look at these markets as a meaningful diversification of funding sources, and as a means of accessing investors that wouldn’t normally participate in other trades that we do across global markets.
While there are undoubtedly disadvantages in terms of the time to market and the documentation process, the Japanese investor base tends to be very stable. Even in volatile markets, once investors are engaged in a market they tend to stick with you from start to finish. They seldom back out once they are committed to a trade, which makes the yen market one that remains open when others are more volatile.
: Are there any circumstances in which borrowers would be prepared to pay up in order to achieve that diversification even when the basis swap is not working in their favour?
Green, Lloyds: That depends on the size of your overall funding programme. If you have a large programme you may be more prepared to pay up for diversification than if you have one with smaller funding needs.
Our view is that we certainly wouldn’t pay dramatically more for diversification. We would always look to achieve comparable pricing versus core markets. The volatility in the basis swap means you have to be prepared for some fluctuations in pricing but you would hope these are restricted to a few basis points rather than anything more significant.
: José, for borrowers from Latin America, what is the main objective of accessing the Samurai market? Investor diversification, arbitrage, or a bit of both?
José Padilla, Daiwa Capital Markets: Investor diversification was once much more important but now it is all arbitrage. Latin American issuers are increasingly savvy about non-US dollar markets. A good number of them have global MTN programmes, they understand their own relative value very well, and most importantly they know how to evaluate this across more than one currency. This was not the case even three years ago.
: How have Japanese investors responded to the shortage of supply in the senior unsecured market from anchor issuers such as Rabobank?
Purton, Daiwa Capital Markets: Their response has been positive. They have found the spread they require by embracing longer tenors, moving down the credit curve, and welcoming regulatory funding formats such as holdco issuance and the new senior non-preferred debt tier from French issuers.
The Samurai track record for these new classes of investment has been very impressive right from the very start of the issuance pipeline. As a result, the yen markets have been able to provide the cost of funding and the volumes needed to attract major international issuers. Had yen pricing not been competitive with levels available elsewhere, we would not have seen the strong volumes that we have.
: Vince mentioned the market for senior non-preferred issuance from French banks, which BPCE opened earlier this year when it offered the first tranche of this new layer of debt in Samurai format in January. Roland, how did the after-swap cost of this transaction compare with the €1bn senior non-preferred trade you priced a few days before your yen issue? And has the main driver of your yen issuance been arbitrage or investor diversification?
Roland Charbonnel, BPCE: On an after-swap basis, our senior non-preferred Samurai compared quite well with our €1bn issue priced a few days before our yen deal. The premium we had to pay over the spread of a senior preferred issue was in fact quite similar.
BPCE has a long-term commitment to the Samurai market and therefore the arbitrage opportunity potentially arising from the basis swap is definitely not our main consideration when we issue in this market. At the same time, we are quite careful to avoid issuing in a situation where the after-swap cost to us would be substantially more than in the euro market.
Our main reason for issuing in yen was investor diversification. In the same manner as BPCE had planned and executed its issuance of Basel III tier two between mid-2013 and end-2016, we want to avoid concentration of our issuance of senior non-preferred debt in any given market. The Samurai market seemed a logical market to tap for us after a careful preparation in 2016, where we had discussed this new layer of debt at length with the Japanese investor community.
This new format may have attracted some new investors, but we were pleased to generate such strong support from our existing Japanese investors, although some banks may have chosen not to participate because of uncertainty about the Japanese risk weighting of senior non-preferred bonds.
: Nadine, earlier this year Crédit Agricole issued something of a landmark transaction when it printed a ¥203.9bn (€1.6bn) benchmark, which was the largest-ever Samurai bond from a European bank. The preferred senior notes in Samurai format in five, seven and 10 year maturities amounted to ¥78.7bn, while the five and 10 year tranches of non-preferred senior were for ¥63.4bn and ¥61.8bn.
Was the main motive for this trade investor diversification? Did this format allow you to tap into a completely different pocket of investors than those Japanese institutions that buy Crédit Agricole in core currencies? Were many of the investors in this deal the same as those that have bought into other Crédit Agricole Samurais?
Fedon, Crédit Agricole: We have been issuing in the Samurai market once a year since 2013 as a means of achieving investor diversification. Japan has a deep savings base, and we roadshow there every year. Since 2013, we have seen a progressive broadening of our Samurai investor base, and the market is now our third-largest source of funding, after the euro and US dollar markets.
Some investors in our Samurai issues also buy in other currencies, but the Samurai format allows us to access some pockets of demand that are specific either to the currency or the format, or both.
In terms of investor demand for our most recent issue, there were more asset managers, trust banks and life insurance companies than in previous years, thanks to the higher yield. Our last Samurai in June also benefited from the scarcity of preferred senior supply, providing some investors who were unable to buy TLAC-eligible debt with three tranches of preferred senior notes in Samurai format.
: Vincent, since making its debut in the Samurai market in 2012, Société Générale has been an active issuer in Japan, and has been especially innovative recently in the use of the yen market as a source of Basel-compliant capital. What have been the main attractions of this market?
Robillard, Société Générale: For an international bank and frequent issuer such as Société Générale, Japan constitutes an important market in addition to the euro and US dollar markets. Therefore, accessing this market on a regular basis is important to our group and consistent with the policy of diversification we launched almost 10 years ago.
The main attraction of this market remains the diversification it offers, but the relative value is another key aspect, which is always considered when we decide to issue in another currency.
The relative pricing of the transactions launched with a diversification component then have to be consistent with, or better than, the cost that the SG Group would have to pay in euros and/or US dollars for the equivalent amount of debt.
The costs of our Samurai issuance to date have been in line with or slightly better than these currencies, but it is true that several other currencies have recently offered better arbitrage both in Europe and Asia.
: What have been the main challenges associated with marketing a French bank in senior non-preferred format to Japanese investors? What feedback did they give about their perception of political risk in France following Emanuel Macron’s success in the French presidential election? And as for the senior non-preferred format, are they completely comfortable with where it sits in the hierarchy of creditor claims?
Robillard, Société Générale: Our main objectives were to ensure that investors had a good understanding of the legal framework of this new debt, which is not tier three but remains senior in the French legal framework and benefits from a high level of protection due to our strong total capital ratio.
Like in all other countries, Japanese investors perfectly understood the characteristics of this new debt, which is becoming a new standard, and were totally comfortable with our senior non-preferred issue.
The investor base was well diversified and balanced among the main Japanese investor types, including trust banks, lifers, asset managers and shinkin. More specifically, we saw a good demand from asset managers as well as from less usual accounts, such as regional investors and corporates, which were also attracted by this new asset class.
Charbonnel, BPCE: The main challenge was to explain the new French format and where it sits in the hierarchy of creditor claims. It was also very important to show the differences between this new format and the approach Germany had adopted previously.
It was quite important as well to highlight the protection offered to investors in senior non-preferred debt by the very large amount of more junior loss-absorbing instruments, and the high level of our total capital ratio was a good measure of that protection. That meant that the pricing of the senior non-preferred could be much closer to the pricing of senior preferred than to the pricing of tier two, especially for maturities ranging from five to seven years. So, yes, we believe that Japanese investors are comfortable with where French senior non-preferred sits in the hierarchy of creditor claims.
Our senior non-preferred issue in the Samurai market took place in January, long before the French presidential election at a time when François Fillon was still the top contender. Later on, between February and April, because of the uncertainty about the outcome of the presidential election, some Japanese investors may have been more careful with French issuers. The Macron win definitely changed that and the perception of political risk in France dissolved completely.
Fedon, Crédit Agricole: Japanese investors understand the non-preferred senior format, and the whole TLAC and European Resolution framework, extremely well.
We also felt that Japanese investors — as well as the broader market — were relieved by the success of Monsieur Macron in the French presidential election.
: Turning to issuance of holdco debt by the UK banks, how has Lloyds used the yen market as a source of regulatory capital?
Green, Lloyds: We started our holdco/MREL funding programme last year, launching our first holdco senior trade in the dollar market in June 2016, and some euro holdco trades in the fourth quarter. Our yen transaction in December was a continuation of that programme, and provided pricing that looked fair versus core markets.
We were keen to build on our presence in the Samurai market, but we didn’t have the opco financing needs last year to use our existing Samurai shelf. At the same time, we believed that in the low rate environment, holdco/MREL product was one that suited the needs of Japanese investors. So it seemed a logical step in terms of our holdco capabilities to start the work on establishing a holdco Samurai curve in that market.
The trade offered us investor diversification and pricing in line with what we could achieve in core markets, so it ticked a number of boxes. As we had relatively modest funding needs it suited us to go out with a relatively small ¥61bn trade which allowed us to have a very targeted approach to the market.
It’s a structure Japanese investors are increasingly comfortable with. The additional spread is certainly attractive to investors. We encountered no particular concerns from investors about the format we brought to market.
: How responsive has the Japanese investor base been to yen issuance in TLAC and MREL debt? What impact has uncertainty about risk weightings had on demand?
Green, Lloyds: In our case, there were some investors who voiced some concern about the potential risk weight treatment of TLAC- and MREL-eligible debt, so chose not to participate. There was also some debate on pricing and valuations with other investors passing on the spreads. Despite this, our holdco trade was very well distributed across a high quality investor base.
Purton, Daiwa Capital Markets: Japanese investors have been very responsive and in an impressively positive way. I have been on several IR trips recently where the topic of regulatory funding formats has been a core part of the issuer’s presentation, and the level of understanding from investors on what remains a very complex and non-standardised subject has been very deep and detailed.
Issuers have come out of these meetings with the sense that they are talking to a knowledgeable investor base, which has given them the confidence to proceed with large and regular issuance. Most key investor types in Tokyo are already open to buying regulatory capital deals, and regional investors are also buying these deals — half of Japan’s 47 prefectures are already active and the number is rising with each new deal.
So the investor diversification that yen issuance has always offered is already available for MREL and TLAC-eligible debt, and the number of deals over the past 12 months shows that the yen market is competitive.
Regulatory funding offers investors a new spread product that they have been seeking within acceptable rating ranges, and will in consequence attract an ever-wider investor following. But you are right to highlight the fact that there has been a brake on the speed and extent of development of the investor base which comes from the lack of clarity on risk weightings.
Even without that clarity, we have still seen some very large trades indeed, but we have seen smaller ticket sizes per investor than on other product. Once we have that clarity — hopefully in the not-too-distant future — we envisage larger individual ticket sizes and more investors by number.
: Are more jurisdictions likely to replicate the French senior non-preferred template? One recent research report puts the TLAC/MREL shortfall at €93bn for French banks, €91bn for Spanish banks, and €48bn among Swedish banks. Will some of this eventually make its way into the yen market?
Purton, Daiwa Capital Markets: The short answer has to be ‘yes’. I am confident that more jurisdictions will announce and implement their templates over the next 12-18 months, and that all the major banks affected will be attracted by the volumes and investor diversification uniquely available in the yen markets. Investors are continually asking us when new jurisdictions will come into play, so there is impressive pent-up demand waiting. And new issuers only need look at the experience of holdco and senior non-preferred yen issues in 2016 and 2017 for comfort internally that this is a market that cannot be ignored.
As for likely investor demand for TLAC and MREL issuance in Japan, most Tokyo-based investor types are actively involved already, and Daiwa’s analysis shows that investors in 23 of the 47 prefectures already buy regulatory funding formats. Given that all 47 prefectures buy standard product, there is clearly capacity for significant additional regional investor support for the new formats as they become more prevalent in the primary market.
: Does Rabobank have any plans to issue TLAC debt in the yen market?
Tanaka, Rabobank: We have issued once in tier two format in the Samurai market as it made economic sense and at the same time allowed for some excellent investor diversification.
As for TLAC, we are still waiting for the Dutch authorities to pass regulation that would allow us to issue. If and when the law paves the way for TLAC issuance by Dutch banks, I believe investor diversification will be a perfect reason for re-entering the Samurai market.
: On the subject of TLAC, are Latin American banks likely to face similar capital pressures to European banks and might they look at the yen market as a way of addressing this?
Padilla, Daiwa Capital Markets: Not yet. Many of them have still not even adapted Basel II. Latin American banks are extremely conservative and have some of the highest capital ratios globally, so there is no dire need. US and Canadian issuers will look to Japan to raise TLAC before any Latin American banks.
: EDF issued the first benchmark-sized green Samurai earlier this year and BPCE has issued a very successful social bond in the yen market. What is the outlook for further SRI or ESG issuance in yen?
Purton, Daiwa Capital Markets: Japanese investors have been strong supporters of SRI product for a decade now, regardless of currency. Daiwa has led nearly 90 public and private SRI trades in that time in nine currencies and with 19 different SRI themes, directed at both retail and institutional Japanese investors. Given the access that the Samurai markets offers to the largest pools of Japanese investor demand, it is a natural fit for SRI issuance.
Empirical evidence of this is indeed the enthusiastic reception for the BPCE and EDF Samurais this year, which followed on from the earlier SRI Samurai deals by EIB and CAF, and the Euroyen Women Bond issued by BancoEstado. Japan is a natural home for all SRI product — including standard and issuer-specific themes under the green, social and sustainable umbrellas — and this is a big focus for Daiwa.
: José, do you expect more borrowers from the Americas to access the Japanese ESG investor base, be it in Uridashi, private placement or Samurai format?
Padilla, Daiwa Capital Markets: There is great potential there. I don’t think Japanese investors will be ready to invest in Brazil again until it returns to full investment grade ratings. But they are closely monitoring all issuers that are active in SRI globally, and we have already seen successful issues in yen from Mexico and Chile.
Latin American issuers are more advanced than US issuers these days with respect to SRI offerings. SRI issuers in Latin America have deep portfolios of sustainable projects that need funding, while US issuers tend to rely more heavily on the loan markets for their SRI funding.
: How much of a deterrent for issuers in the Samurai market is the volatility rather than the absolute level of the swap? Given that the issuance procedure is notoriously long-winded, how much of a problem can execution risk be in the primary market?
Purton, Daiwa Capital Markets: This is an important point, and an area where intermediaries and issuers have been working together to mitigate the extremes and to reduce the length of the market risk at play. It remains a work in progress but we are seeing a reduction in marketing period length. We are also seeing some issuers spread the total volume swap execution into different timing silos to avoid moving the quotes.
Robillard, Société Générale: It is true that the long-winded marketing phase is a strong drawback and a real disadvantage for the Samurai market. As our decision is driven by the after-swap level against euros and/or dollars, the volatility or deterioration of the basis during the process can jeopardise a transaction. To mitigate this execution risk, which cannot be fully cancelled, issuers are able to pre-hedge a part of the transaction and/or limit the size of the issue during the execution process.
Charbonnel, BPCE: Although we are not looking for arbitrage opportunities in yen, we want to avoid having to pay substantially more than in our domestic market. So obviously the volatility of the basis swap is an issue when the official marketing period is typically four days. This is why in our social bond Samurai in June we convinced our joint lead managers to shorten the official marketing period by one day. We believe this is the way forward and we are anxious to shorten the official marketing period even further so that it can ultimately be brought more into line with normal practice in the euro and US dollar markets, where execution is on an intra-day basis.
Fedon, Crédit Agricole: The documentation and issuance process is indeed lengthy and resource-intensive.
As with any other market, there is an execution risk, although the extended bookbuilding process keeps the issuer exposed to market volatility longer than in other markets. We adapt to local market practices, but would welcome a shorter bookbuilding process.
: Are there any risks of capacity constraints in terms of Japanese investor demand for TLAC debt, or for broader absorption of FIG issuance in the yen market from overseas borrowers? Although we have seen a little diversification, thanks to issues from EDF and Indonesia, is the Samurai market too concentrated on bank issuance?
Robillard, Société Générale: So far, we have not considered the capacity of the market to be a significant risk, because TLAC debt will probably replace a part of the former senior debt market.
Fedon, Crédit Agricole: I agree. We have seen a good take-up of French non-preferred senior debt and are not concerned with market capacity for our name. There might be more TLAC-eligible paper issued in the months and years to come, but part of it will substitute preferred senior debt.
Purton, Daiwa Capital Markets: Let’s not forget that we are seeing a healthy volume of redemptions in 2017 and 2018, including some of the tranches launched in the bumper years of 2014 and 2015, which will support good volumes of new issuance.
We are certainly not hearing of capacity constraints from core investors for FIG product, but we do need clarity of risk weightings to help regulatory funding capacity reach its maximum. The market is there for all issuer types, but the reality at present is that FIG issuers have larger programmes that fit within the parameters of yen investor preferences than other issuer types.
However, the experience of the sovereign, agency and corporate names that access the market shows that there is also plenty of investor demand for them, and we are engaging with several prospective issuers right now.
Charbonnel, BPCE: We agree that there is the potential for broader absorption of FIG issuance in the yen market. That’s why we are trying to diversify our investor base within Japan and as part of our normal marketing effort, besides key central investors in Tokyo, we regularly visit existing or potential regional investors.
: We recently saw Starbucks access the yen market in Euroyen rather than Samurai format. José, do you think this was a one-off, or would you expect other US corporates to access the yen market?
Padilla, Daiwa Capital Markets: Because the domestic market has been so competitive for so long, both in terms of pricing and unquenchable thirst for issue size, US borrowers tend to treat the Japanese markets as niche plays. That said, we have seen a lot more issuance from US corporates looking to diversify away from dollars and euros mainly because the need for M&A funding has been so strong. In the case of Starbucks, issuing in ESG format in Japan was a milestone.
: How receptive are Japanese investors to Latin American names and for the added yield that they can offer in the yen market? Historically, borrowers from Latin America accessed the market with a JBIC guarantee. Are Japanese investors ready to buy these names in unguaranteed format?
Padilla, Daiwa Capital Markets: Issuer ratings are higher across the whole of Latin America. I would venture to say that this, plus the overall lack of supply by sovereigns in the yen markets, makes it likely that some would be able to tap the markets in unguaranteed format directly.
Other sovereigns will find it easier to graduate to full non-guaranteed status by taking the intermediate step of issuing a dual tranche in guaranteed and non-guaranteed format, as Indonesia has done in the past.
: What other trends have been seen in the evolution of the Japanese investor base over the past 12-18 months? Are there still sections of the Japanese institutional investor community that borrowers have yet to access, especially among some of the regional banks?
Robillard, Société Générale: It is fair to say that the investor base has widened in recent years, with Japanese investors more keen to invest than they were five years ago in both longer tenors and more subordinated debts, such as senior non-preferred and tier two. This recent trend can probably be explained both by the impact of the low rate environment in Japan and the strong, recognised improvement of the balance sheets of core European banks such as Société Générale over the past 10 years.
We usually organise one or two credit updates per year in Japan, but so far these have been concentrated in Tokyo. For us, the main challenge involved in reaching out to smaller Japanese institutions remains management time. Meeting with smaller investors in the regions outside Tokyo is nevertheless something we intend to consider.
Purton, Daiwa Capital Markets: We have seen growing breadth of investor support across Japan’s entire investor base, including for regulatory funding. Daiwa is now selling Samurais to investors in all 47 of Japan’s prefectures. One important trend in recent times has been evidence that core regional investors are switching focus from foreign currency to domestic yen investments, and the Samurai product is a major beneficiary as it offers a good spread versus other domestic alternatives.
Charbonnel, BPCE: BPCE intends to remain a regular issuer in the Samurai market. It has been our policy for a while now to issue twice a year in the Samurai institutional market and we plan on continuing to do so.
Regarding marketing targeted towards regional investors, we believe it’s worthwhile, although it is indeed time-consuming.
Purton, Daiwa Capital Markets: It is a time-consuming business for issuers and banks to court regional accounts, but well worth the effort in terms of the long-term support that results. Yes, ticket sizes are smaller on average than from the large institutional accounts, but some can be very significant, and there are several examples where total regional placement on a new Samurai has been larger than from the Tokyo-based investors.
Regional demand always generates incremental support for a deal, but can sometimes be a bigger determinant of final volume and pricing. A strong branch network is needed to overcome the linguistic and cultural differences that can arise and to provide a full explanation of new formats, structures and credits, but this is what we do naturally.
: Kaz, although you have not been active in the primary market this year, it is presumably essential to keep an open dialogue with existing investors and to engage where possible with potential new ones?
Tanaka, Rabobank: Yes. Because we have so many bondholders in Japan, it is essential to keep them updated on our results and developments within our bank, just like we do with major investors in all other markets where we have a presence. In that regard, we conduct two major roadshows in Tokyo annually, one following our annual results and the other after our interim numbers are released.
Aside from those exercises, I take advantage of the fact that I am based here in Japan to visit investors outside Tokyo. These investors could be current or past holders of our paper, or those who have a keen interest in our name.
Green, Lloyds: Over the past few years we have conducted a number of meetings with regional accounts. It’s important to broaden the range of investors who are engaged with our name. The take-up of debt from regional investors is probably a little slower in holdco format, given the nature of the investor base which is more concentrated among banks, so the question of risk weights is more pertinent than among some of the city-based investors. But we will continue our regional investor work to maintain as broad an investor dialogue as possible.
In a normal year, we would be reasonably active in opco private placements, many of which find a home in the Japanese market, so it’s important to undertake this regional work as well as maintaining a dialogue with the city-based accounts.
: How is the evolution of the investor base influencing maturities in the Samurai market?
Purton, Daiwa Capital Markets: Our data shows that, driven by investors’ search for yield and spread, average tenors are lengthening. Whereas three or four years ago the focus was on the two to five year tenor range, it is now on five to 10 year issuance, with additional reverse enquiry demand out to 15 and 20 years.
Over 60% of issuance volume in 2013 was three years or shorter, whereas in the first half of 2017 more than 60% has been seven years or longer. More investors will now consider tenors as long as 10 years on a case-by-case basis, and seven years has emerged as a core maturity. This is particularly noteworthy as it tends to be a problematic maturity in many other markets, but not in Japan, which is a buy-and-hold market. Issuers can free themselves of liquidity-based influences on tenor and instead choose what best fits their debt management imperatives. It remains standard to see a range of tenors being offered in order to access pools of demand from different investor types, and a big range of sizes per tranche from very small to very large indeed. The market is very issuer-friendly in this regard.
As has been mentioned earlier, an interesting development has been the successful combination of senior preferred and senior non-preferred tranches together on a couple of trades in 2017, just as we saw senior and subordinated debt tranches being offered together in 2016. This ability to combine tranches from different debt tiers and with different ratings is a unique positive of this market and gives maximum debt management flexibility to the issuer.
: There has been some discussion about the pot system being adopted in the Samurai market. Would this bring about any material change in how deals are marketed?
Charbonnel, BPCE: We prefer the non-pot system because it makes it easier to measure the performance of each lead manager. The only benefit of the pot system from our perspective would be if it shortened the execution period, which we discussed earlier.
Purton, Daiwa Capital Markets: We have seen the pot system offered in some global yen formats recently and on a couple of domestic deals, and there is a growing debate about the pros and cons of using this in the Samurai market. Using a system that is followed in other core markets has obvious value in terms of standardisation, can boost market transparency and, by improving the monitoring of demand growth in a timely manner, can shorten the marketing period required on trades.
But at the same time there are privacy issues as regards the openness of the order book that run counter to preferred domestic market practice for some important investors, plus the pot system makes it harder for issuers to analyse the relative sales performance of different bookrunners. So it is not a simple one-way debate.
Investors need to be comfortable with any changes to market practice, and let’s not forget that it is precisely that investor diversification which is a major attraction for issuers to these markets in the first place. If enough key investors signal their comfort with the pot system, this could be the trigger for potential innovation.
In the meantime, I think there are other modifications to market practice that will have a greater impact: efforts to reduce market risk, for example, and to reduce the burden of disclosure and documentation, which the Pro-Bond market has helped to highlight and reduce. But the use of the pot system is an area where we will see continued dialogue going forward.
Fedon, Crédit Agricole: We welcome changes to the bookbuilding process if it makes it more transparent and faster. The pot system works well in other markets and we will certainly think about its benefits when we look at the market again.
Robillard, Société Générale: Should the Samurai market reform itself to converge towards international standards in terms of the execution process, including documentation, marketing and transparency of books, then our group could probably decide to increase its access to the Japanese market depending of course on the market depth.
: How appealing is the Tokyo Pro-Bond market?
Tanaka, Rabobank: As a regular Samurai issuer, I do not see the Pro-Bond market either as an alternative or complementary funding avenue for us. If, for whatever reason, we needed to issue in Euroyen format, we would do so and not bother with the Pro-Bond market.
Fedon, Crédit Agricole: It feels there is little or no pocket of investors we are missing out on when using a Samurai format instead of a Pro-Bond. We can also use our EMTN documentation to issue private placements as and when needed.
Robillard, Société Générale: At this stage, our priority is to continue issuing in the Samurai market. Should the Pro-Bond market develop and offer a competitive advantage compared with Samurai in terms of process and/or price, then we could consider using this alternative format.
Charbonnel, BPCE: We have not considered using the Pro-Bond market. The Samurai market has worked quite well for us. Even though our first issue was less than five years ago, I believe we are now the largest Samurai issuer, and we intend to remain committed to the market.
Purton, Daiwa Capital Markets: The Pro-Bond market has obvious appeal in terms of the reduced burden of disclosure and documentation to new issuers put off by the onerous requirements for debut Samurai issuance. And for issuers focusing more on speed of issuance when the basis swap is right rather than on volume maximisation and investor diversification, the time between mandate and launch is shorter, but the investor base is smaller.
The Pro-Bond market can also serve as a useful entry point to Japan for issuers with a long-term strategic desire to maximise investor diversification, insofar as successful Pro-Bond issuance will provide empirical reassurance that the work involved in subsequently reaching out to a wider investor base via the Samurai format is likely to be worthwhile.
Also, as well as Pro-Bond debutants moving to the Samurai format, we now see some Samurai stalwarts setting up Pro-Bond programmes to use alongside continued Samurai activity depending on the specific strategic ambition of an individual transaction. Whether the aim is to achieve benchmark size and investor maximisation, or instead to ensure speedy issuance and a more targeted trade, both issue formats can be useful.
Finally, as more issuers look to Japan for regulatory funding, the Pro-Bond format can appeal to those jurisdictions where there is a preference or a need to issue under local law, which the Pro-Bond format allows. As regulatory funding volumes grow on the back of more jurisdictions announcing their own formats, Pro-Bond issuance may grow significantly. But of course many other jurisdictions will be comfortable with Samurai issuance under Japanese law, and affected issuers will continue to favour the traditional market to maximise investor reach, including access to those investors needing new issues to be eligible for inclusion in the core domestic market bond index, which the Samurai format offers. The two formats can work well alongside each other to help maximise overall yen issuance volumes.
: Several FIG issuers from the Americas — north and south — have issued in the Pro-Bond market. Will we see more borrowers from the region stepping down this route?
Padilla, Daiwa Capital Markets: Absolutely. We have already seen numerous bank issuers tap Pro-Bond and we think this will continue for future deals. We are hopeful that soon Pro-Bond will be captured by the Samurai index. Once that happens we should see more Japanese regional investors participate and grow that market even further.
I would not read too much into why many US borrowers have chosen to issue in Euroyen or Pro-bond rather than via the traditional Samurai approach. US borrowers spend countless sums on lawyers to help them with their SEC filings and those price tags continue to grow each year, and most US issuers don’t want to add another regulator. Proctor & Gamble and Pfizer both tested the non-Samurai format long ago and US borrowers now have a second choice in Pro-Bond, so I expect more issuers to follow this path.
: What are the short- and long-term prospects for issuance volumes in the Samurai market? If we assume that one of the main determinants of primary market activity will be the basis swap, what are the principal drivers of swap levels, and what is the immediate outlook for the yen-dollar basis?
Purton, Daiwa Capital Markets: The basis is driven in large part by issuance volumes by international borrowers in yen on the one hand, and by volumes of non-yen issuance by Japanese borrowers on the other. Another driver is asset swap activity in both directions, together with credit spread and forex volatility.
Insofar as yen issuers show timing flexibility within black-out constraints to minimise the risk from competing supply, and insofar as Japanese issuance in international markets continues on its recent strong trajectory — the strongest since 1989 — I believe the immediate basis swap outlook is more favourable than what we have faced in recent years, albeit with continuing volatility.
: Kaz, what is Rabobank’s redemption schedule in yen looking like? Would you consider refinancing any maturing Samurai issues even if the basis swap wasn’t attractive, in order to maintain your yield curve?
Tanaka, Rabobank: We have a fairly heavy redemption volume later this year, in excess of ¥120bn. But we would not look to refinance those issues just because they are yen-denominated. We do not have natural yen needs, so new issuance in yen is based on cost-effective funding, not maintaining a yield curve. In fact, due to the low level of secondary trading activity in the Samurai market, we look at our euro and dollar curves as reference curves.
However, we want to maintain our relevance in the market, so would hope that market conditions turn favourable to allow issuance yet once again.
: Can we expect the banks on this panel to return to the yen market soon?
Green, Lloyds: Much like any other market that we are active in, we want to be programmatic where our funding needs allow, which means remaining active in investor relations and showing a commitment to the capital market through regular issuance. We see the yen markets as being an additive and important source of funding for the group away from our core markets.
Robillard, Société Générale: Although we never give specific details of our funding programme, we can say that our 2017 long-term programme is very well advanced and that our needs for the rest of this year are relatively limited. As mentioned previously, the Japanese market is important for groups such as Société Générale. Should market conditions remain consistent with our objectives, both in terms of volumes and funding costs, then there would be no reason our group would stop being committed to this market by issuing on a regular basis.
Fedon, Credit Agricole: Our funding programme for this year is almost complete, so we will most likely not issue again in Samurai format in 2017. However, we plan to remain a regular issuer in the Samurai market, and we will continue to monitor market conditions and relative value opportunities versus other funding options in 2018.
Purton, Daiwa Capital Markets: The pipeline of new issues looks very encouraging in the short and long term, although precise timing will always be influenced by secondary spread performance in other markets and by short-term basis swap gyrations.
My confidence is based on the compelling story underlying the commitment of all issuers to this market, namely the unrivalled investor diversification that it offers. I see this investor base growing further as regional accounts increase their focus on domestic assets. And this is now clearly applicable not only to senior unsecured but to other debt categories, too.
The market has already shown its capacity to offer large volumes of regulatory funding to borrowers as well as more traditional debt tiers, and will attract more investors as each new deal surfaces. Clarity on risk weightings will also be a boost. And there is pent-up demand for regulatory issuance from new local jurisdictions as these become available during the next 12-18 months.
We are seeing new credits look at the market, as well as borrowers that are considering returning after an absence of several years — and not only financial names. This is a sign of a healthy market. We have seen impressive issuance under the SRI umbrella too, which will encourage other issuers to explore the potential of the market across many standard and issuer-specific themes.
Another important driver of activity this year — arguably the most important driver, particularly for some senior unsecured funding — is the secondary spread environment globally. Here I am also optimistic that we may see a gradual return to more historically normal levels over the next 12-18 months, which will be good for all markets, including in yen.