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Japan’s leading credits navigate a volatile market

By Matthew Thomas
28 Mar 2019

Japan’s top issuers occupy a unique part of Asia’s bond market landscape. They are well-regarded enough — and rated highly enough — that moments of fear in the credit markets can lead to more demand for their deals, rather than less. They face a domestic bond market defined by negative interest rates, an investor base that is ultra-sensitive to movements in the swap rate and an expectation from the government that their funding costs will remain tight.

Japan 2019

They are also spoilt for choice. The dollar market is clearly open to them, as is the market for euro-denominated bonds. But investors across Asia’s local markets have also welcomed these issuers with open arms. Their strength means government approval is also easy to secure, at least compared to the situation facing other issuers.

These factors make a treasurer’s job both easy and hard, both simple and complex. The main hurdle is not so much convincing investors about your credit strength but convincing them to accept ultra-tight pricing in exchange for security. How can this be achieved? GlobalCapital sat down with some of Japan’s best-known issuers to find out. 

Participants in the roundtable were:

Nobuo Inohana, director, finance department, Japan Finance Organization for Municipalities (JFM)

Noriyuki Ishikawa, director, capital markets and funding division, Japan Bank for International Cooperation (JBIC) 

Satoko Tanaka, director, Japan International Cooperation Agency (JICA)

Akiyo Miyakawa, director, division of financing, Development Bank of Japan (DBJ)

Naoki Sato, director, bond section, budget division, bureau of finance, Tokyo Metropolitan Government (TMG)

Tatsuya Yasuda, head of international DCM, debt capital markets department, Nomura

Matthew Thomas, Asia bureau chief, GlobalCapital

GlobalCapital: Japanese issuers faced a very different environment in the international bond market last year. Stock market volatility, geopolitical shocks and increasing worries about US interest rates ensured that dollar bond issuers were forced to be more careful with timing and deal structures. How did you adjust your strategy last year? And what are you planning this year?

Tatsuya Yasuda, Nomura: The market environment remains quite favourable, but since October 2018 we have seen signs of change. There are various risk factors on the horizon now, including the trade war and risks in Europe that appear to be spreading across the continent. While we had seen a trend towards monetary policy normalisation, there was some change last autumn.

In the meantime, investors became less willing to buy longer maturities and they started to be more aggressive in pursuing higher yields as the dollar curve flattened. That made selling long-term bonds very difficult for some issuers. That started in October or November last year but the issuers on this roundtable front-loaded a lot of their funding in the first half of the year and had almost completed their funding activities in the international market by the end of October. Therefore, they were not adversely impacted by the market volatility.

This year, choosing the appropriate timing for bonds is going to be very important. There is also a question about the most optimal funding options such as tenor, size and asset classes, since investors are still somewhat selective. We investment banks need to watch the market very closely so we can provide the best advice for issuers. 

Noriyuki Ishikawa, JBIC: In 2018, our annual budget for funding was roughly $15bn throughout the year. But in reality, we raised around $6.5bn, mainly due to the slowdown of our lending demand from the borrowers. We had planned to come to the bond market about once a quarter, but we ended up only funding twice, in July and October. 

We actually felt the affects of the volatility, especially in our second round of funding in last October. We raised $3bn from a combined five and 10 year bond. At that moment, there was trade friction, concerns about Brexit and wider worries about volatility. Even under such market conditions, we still found strong demand for three and five year bonds. However, with regard to 10 year bonds, we faced some difficulty. 

We need to issue such longer-dated paper on a regular basis for our asset-liability management needs. However, the market situation made the longer dated maturity a bit of a struggle and investors were not well prepared for these bonds. The flattening of the yield curve also did not attract them. We will need to be more careful this year.

Nobuo Inohana, JFM: Usually we issue a $1bn bond twice a fiscal year. In fiscal year 2018, we sold these deals in April and September. We returned to the market earlier this March, selling a $1bn five year deal. 

Japan 2019

We are definitely seeing an increase in the volatility in international markets. In these market conditions, we successfully executed the recent five year deal, which was a pre-funding for our fiscal 2019 funding plan, which starts from April, with the purpose of avoiding several geopolitical risks.

We always look at the market carefully and we keep an open dialogue with investors. So far we have been able to fund successfully. 

Satoko Tanaka, JICA: The size of our issuance is small compared to some of the other issuers on this roundtable. We tend to issue $500m every year and we’re consistent about sticking to that. In 2018, we issued in early June but we had started preparing for that deal in May. At that time, we started to see political unrest in Italy.

We have a government guarantee for our bonds, so we discussed the situation with the government after initially planning to sell the deal in May. We decided to wait for a calmer market. We don’t know how the market will develop in 2019 but this lays a template — we will be cautious and we will be patient for the best window.

Akiyo Miyakawa, DBJ: On an annual basis, our public offering of foreign bonds with a government guarantee is ¥200bn ($1.8bn). That is already budgeted, so we will have to do our best to hit that. But for our unguaranteed international bond issuance, we could allocate any amount we like from a total of ¥580bn. We are considering raising about ¥150bn from the international bond market at this point.  

Japan 2019We have recently begun issuing sustainability bonds. Last year, we raised €700m from this market and we would like to issue a benchmark-sized bond in the 2019 financial year as well. 

In terms of our government-guaranteed bonds, we have issued five and 10 year dollar bonds for the last few years, often in the late summer. We’re similar to JBIC in that we want long-tenor bonds whenever possible. But the yield curve is flattening in the dollar market, so 10 year bond investors are hard to come by. We are also facing challenges attracting Japanese investors into these deals, due to the rise of the funding cost for them. 

Looking back on our latest SRI bond deal done last October, some investors expressed concern about the fiscal problems in Italy and the likelihood of European Central Bank rate hikes and hesitated to invest in our seven year bond. We are content with the result of our deal, but the final demand was not the biggest we have seen.

Naoki Sato, TMG: Heightened volatility continued in the dollar market during the year. When TMG issued a $500m five year bond in May, the impact from political uncertainty in Italy was a particular concern. By carefully monitoring the market to execute the transaction at the most suitable time and by having close communication with overseas investors through roadshows, we chose terms that would attract decent demand. 

The market expects rate hikes in the US to slow down in 2019, which could lead to some level of change in market conditions compared to last year. However, we are hearing that demand for Japanese SSA bonds will remain strong. We will plan our funding strategy based on TMG’s funding needs and by considering the appropriate tenor, currency and other factors, depending on the market condition. 

Japan 2019

GlobalCapital: Hasn’t the volatility we’ve seen over the last year caused a flight to quality? That would presumably be good news for the issuers on this panel.

Yasuda, Nomura: In this market circumstance, with high volatility, investors have taken a wait-and-see approach instead of entirely shifting their focus to quality names.

They have stopped investment activity in the hopes of seeing some level of consensus develop in the market, regarding the issues which caused market volatility. As a result, the heightened volatility we have seen in the last year or so has not really been an advantage, even to the type of issuers that we have here today.

GlobalCapital: Several issuers mentioned the difficulty of securing demand for 10 year bonds. Isn’t this all just a question of pricing? Investors may be more reluctant to take long-dated exposure in the dollar market at the moment, but there is still some demand. 

Tanaka, JICA: From a historical standpoint, spreads are still very tight, so even if we have to pay a bit more to get a 10 year bond done the pricing is still advantageous. But pricing is still important. The benchmark for us is the cost of borrowing from the Japanese government and converting that into dollars. The condition for us to issue bonds with a government guarantee is that the funding cost is cheaper than the borrowing rate from the government on a stand-alone basis.

Ishikawa, JBIC: We feel there is no market consensus regarding 10 year rates yet. Unless that consensus is there and investors are ready, it may be difficult for us to consider the possibility of issuing these longer tenor bonds. We need to be careful about market conditions and we need to stress the importance of long-term relationships with our investor base.

Inohana, JFM: Yen bonds in the Japanese market have been our mainstay in the past. Foreign currency bonds have only accounted for around 10%-20% of our funding. Rather than match duration between funding and lending in terms of asset-liability management, we simply make the most of opportunities when they present themselves. 

That has been our stance in the past — we look at the offshore markets and figure out whether we can get cheaper funding than in yen. That gives us a lot of maturity options, but we will focus on the tenors that are most advantageous. If we have to pay-up significantly for a 10 year bond, we will simply stick with issuing shorter tenor notes.

Miyakawa, DBJ: We use foreign currencies for our international businesses, so there is a direct rationale for us to issue bonds denominated in foreign currencies. The other important objective is to diversify the investor base as much as possible. However, those objectives do not necessarily mean that we would be willing to issue bonds without regard to the cost, because we are also benchmarking ourselves against the cost of funding in the domestic yen market. That does not give us much flexibility in terms of the timing of the issuance.

GlobalCapital: How attractive are euro bonds at the moment? Are they a realistic alternative to dollar funding, especially at the longer end of the curve?

Japan 2019Ishikawa, JBIC: We have been able to identify a funding cost advantage against dollars, particularly in the longer tenors. There is also an advantage when it comes to the maturities on offer. In the dollar market, the benchmark tenor is three to five years but in euros it is possible to go longer, to 10 or 15 years. 

But at the same time, even though the euro offers an advantage in funding costs, we have not tapped the market for many years. Those issuers who are putting in the work to build strong relationships with European investors need to have a determination and a willingness to make regular issues. We cannot simply look at short-term fluctuations in the funding cost.

Tanaka, JICA: We don’t have any euro assets, so even if we fund in the euro market it will have to be swapped into either yen or dollars. We are considering euros and sterling but for the most part we will concentrate on dollar funding since that matches our assets.

Miyakawa, DBJ: In terms of the tenor, especially in the case of government-guaranteed international bonds, we may consider bonds in euros, since longer tenor dollar bonds do not seem to attract investors under the recent market circumstances. We made one SRI bond issuance in euros in the previous fiscal year and we might continue to do that. Although the size is not so big, we do have some euro exposure in our book, so we could keep the money we raise in euros to some extent.

Sato, TMG: When we issue bonds in non-yen currencies, we swap the entire amount into yen and allocate it to our expenditure budget. In this regard, the funding cost is crucial for us. In recent years, dollar funding has been more attractive than euros from a cost perspective. However, depending on the market conditions, we think there could be situations where euro-denominated bonds could provide us with a competitive funding cost. 

GlobalCapital:What other markets could the issuers on this roundtable tap to either lower their funding costs or hit their maturity targets? Are any local currency markets attractive? Or private placements?

Yasuda, Nomura: One challenge Japanese issuers face when trying to find other funding markets is the lack of depth of the market. These issuers tend to have a large funding requirement, measured in the billions. Although the dollar and the euro markets are large enough to accommodate such a requirement, a lot of other markets fall short. 

Sterling and Australian dollar bonds may be attractive, but can we achieve $1bn equivalent size with one issuance? It is more realistic to see a $500m size as a benchmark deal in these markets. It may be more appropriate to tap these markets through private placements, but the opportunities are not always available from a cost perspective.

The renminbi market — for example, Panda bonds — is also not big enough for foreign issuers. There may be some policy-backed funding, but other than that the market is increasingly dominated by Chinese issuers

Ishikawa, JBIC: When we have a local use of proceeds, we look at the local bond market as well as the cross-currency swap market to consider the best way to fund. In the past, we have actually looked at several southeast Asian currencies such as Thai baht and Malaysian ringgit. We also considered the renminbi and G7 currencies such as sterling, Canadian dollars, Australian dollars and so on. In fact, we have issued bonds in sterling and Canadian dollars to finance infrastructure projects in those countries. It is still possible for us to issue in non-US dollar currencies but that remains our main funding currency.

Japan 2019

Inohana, JFM: It goes back to the same issue for us: our assets are all in yen, so the relevant number for us is the funding cost in yen. I agree that sterling and Australian dollars are worth looking at, but at the moment we see the best opportunities in the dollar market. We also want to make sure that we’re offering plenty of liquidity to our investors, so any market we enter needs to allow sizeable issuance. Private placements are possible, if they’re cost-competitive, and we did issue some long-term Australian dollar bonds in the previous fiscal year.

Tanaka, JICA: We want to establish our position as a frequent issuer in the dollar market. We’re still in the learning process in that sense and we’re not yet diversifying the currencies we use to issue our bonds. We’re not allowed to use private placements, so there’s no possibility of that.

Miyakawa, DBJ: We can sell both public and private deals and, in terms of currencies, we have tapped the sterling, Australian dollar and New Zealand dollar markets in the past. But all the factors that have already been mentioned here are also important for us: the after-swap funding cost, the depth of the market, the possibility that we are going to be a repeat issuer. There are a lot of things to consider before tapping another market.

Sato, TMG: We have been issuing dollar bonds for eight consecutive years. Since 2016, we have mainly issued in dollar 144A/Reg S format, which allows us to access some US investors. The main alternative foreign currency market for us would be the euro market. 

GlobalCapital: Where do you see the global capital markets being in a year? What are the major risk factors that you’re worried about — and how are you planning to navigate those risks?

Yasuda, Nomura: The risk tolerance of investors in the bond markets may have increased, in my view. For example, the US non-farm payroll numbers released on March 8 were significantly lower than expected. If those numbers had been announced only a few months ago, it might have had a major impact on the market. We did see a dip but it wasn’t too extreme. 

Japan 2019There are numerous risk factors on the horizon. The trade war, Brexit, Italy, and so on. However, monetary authorities are trying to manage the risks with their prudent approach to monetary policy. That is one of major factors investors are looking at when deciding how to deploy their abundant cash. If there is any sign of heightened risk, they tend to be in wait-and-see mode. That said, at this point investors are surprisingly resilient.

We shouldn’t be too afraid of risk. The debt capital markets will continue to be open. However, issuers need to choose the best size, maturity and asset class to achieve their funding targets. They will continue to have those choices in the fixed income market.

Ishikawa, JBIC: Those risk factors will stay with us but every year new risk factors emerge. How can we prepare for that? We need to listen to investors and the market, and make the most of opportunities when they present themselves.

At the end of last year, there was total confusion over Brexit. We were quite concerned what would happen to the sterling bond market, but at the start of this year SSA issuers were quite active. Investors had a lot of money to put to work and issuers wanted to pre-fund, so they ended up finding equilibrium. 

For fiscal year 2019, our total funding plan is $9.8bn. The breakdown of that is $3.4bn that will be funded with a tenor of less than five years and $6.4bn that will be funded with a tenor of five years or more. JBIC’s issuance activity always shows three, five and 10 year issues and we want to use the same maturities again this year. But as mentioned already, the dollar yield curve has flattened. We need to take that into consideration, so we may look to euros or perhaps to other currencies outside of the dollar.

Inohana, JFM: The performance of the global economy has become more difficult to predict this year. This means we should expect continued volatility in the market. We will continue with our strategy: making sure we are ready for very rapid bond execution when the market looks attractive. We need to act quickly to ensure flexible funding. We will be very careful in maintaining dialogue.

Tanaka, JICA: As Yasuda-san said, investors seem to have a higher tolerance for risk factors at the moment. But at the same time, we see moments of volatility that don’t appear to be explained by any change in the underlying economic reality. This is where advice from banks and securities companies becomes crucial. They can help us figure out what is driving the market.

In 2019, we have in mind a $500m issue. We have issued four times in the international market and whenever we tried to issue with longer tenors we’ve been supported substantially by Japanese investors. The current situation is that Japanese investors aren’t showing much demand for long tenors at the moment because of higher hedging costs. Our preference is to issue with longer tenors but we have to be realistic about where the demand is coming from and provide short tenors if necessary.

Miyakawa, DBJ: Since we foresee a number of risk factors in the market next fiscal year, the most important thing for issuers will be to try to keep flexibility as much as possible. JFM’s recent dollar bond was a great example of flexibility.

While we continuously try to establish strong and stable relationships with our investors, we need to watch the bond market and be ready to strike quickly when an opportunity presents itself. 

Sato, TMG: We understand that international markets will always be impacted by the global political and economic situation. Uncertainty is especially strong this year with headlines of slowing global growth resulting from the prolonged US and China trade negotiations, the depreciation of emerging market currencies, upcoming elections in Europe and Brexit. Issuing non-yen bonds will allow us to diversify our funding options, spread risk, achieve cheaper funding costs and communicate our sound financial condition to the international market. We intend to continue issuing non-yen bonds, but we will adapt to market conditions to take advantage of the investor depth and flexibility — in both currency and products — of such markets.

Yasuda, Nomura: We have seen a turnaround in monetary policy. The US Federal Reserve has become more dovish. Rate hikes will be on hold for some time and quantitative tightening is also going to be slowed down. The market will be a bit more predictable over the next six months or so — at least, that’s the impression that I have. 

But what about beyond six months? If the dovish monetary policy turns out to be effective, we will see a knock-on impact on the global economy. That will, in turn, lead to more flexibility for central bankers, so we will once again have to face questions about future rate hikes. That would cause volatility and the possibility cannot be denied at this time. It is very difficult to predict the long-term, but the next six months is relatively easy to predict. That means that issuers should hit their funding targets sooner rather than later.   

By Matthew Thomas
28 Mar 2019