TLAC has been a driving factor behind a lot of the debt issued by global systemically important banks (G-SIBs) in recent years. But in 2019 the JFSA made it more punitive for bank treasury investors to invest in TLAC paper from financial institutions.
The agency introduced new rules from April that mean Japanese banks with TLAC holdings worth more than 5% of their core capital will have to put a 150% risk weighting against any additional purchases of TLAC-eligible senior debt. This is much higher than the 20% risk-weight the bank treasuries had previously had to apply to nearly all of their TLAC senior bond purchases.
Despite the changes, foreign banks have remained very active in the yen market in 2019. They had supplied Japan with ¥1.22tr ($11.12bn) of debt issuance in the first eight months of the year, having sold a staggering ¥1.97tr in 2018. That’s partly because the new risk-weight system has not completely drained demand for TLAC paper in the yen market, as Japanese investors of all types continue hunting for new sources of yield. And smaller banks subject only to the minimum requirement for own funds and eligible liabilities (MREL) in Europe have also been able to benefit recently, given that MREL-eligible senior bonds have remained subject to a 20% risk weight in Japan.
Amid the healthy volumes of international bank debt supply in yen, some issuers have been experimenting with new approaches and formats. Newcomers have leaned on the Tokyo Pro-Bond market as a gateway to yen liquidity, while stalwarts of the Samurai bond markets have considered whether there might be value in complementing their funding strategies with Euroyen deals in Japan.
Finally, talk is also beginning to turn about the possibility of a burgeoning green bond market in Japan.
GlobalCapital asked prominent borrowers in the yen market for their thoughts on what has been a very interesting period for international bank issuance in Japan.
Participants in the roundtable were:
Alessandro Lolli, head of group treasury and finance,
Peter Green, head of public senior funding and covered bonds, Lloyds Banking Group
Roland Charbonnel, director of group funding and investor relations, BPCE
Vincent Robillard, head of group funding and collateral management, Société Générale
Tyler Davies, moderator, GlobalCapital
GlobalCapital: How would you describe the financing conditions we have seen in the yen market this year? Would you say that it has been a good year?
Alessandro Lolli, Intesa Sanpaolo: Up until now I would say 2019 has been the year of the euro market. Many big US corporates have visited the euro market, for example. And at the end of June, consistent with Intesa Sanpaolo’s business plan presented at the beginning of 2018 by our CEO Carlo Messina, we issued a €2.25bn dual-tranche deal of five and 10 year bonds in euros, which was the largest euro transaction on record for an Italian bank and was priced between 30bp and 35bp, respectively through BTPs. That gives you some idea of just how compelling the euro market has been in terms of both size and cost.
In a sense it has taken some supply away from the dollar and the yen market. If I look at the numbers on the Japanese market — including Samurai, Tokyo Pro-Bonds and Euroyen deals — I see that in 2018 we had roughly $3.25bn in issuance and year to date we have about $2bn. So the volumes are lagging behind a little, though it is not a dramatic decline.
There has not been any weakness in the Japanese market; it is just that the euro market has been extraordinarily strong. There is still a lot of potential for issuance in the Japanese market. Japanese investors are thirsty for yield and they are very willing to buy international issuances.
Roland Charbonnel, BPCE: I would say that funding conditions have improved across the year in some ways. It is our usual policy in the public Japanese yen market to do two bond issues each calendar year. We did one transaction in January and one in June, but the spread levels were very different at these times.
In January spreads were quite wide because of issues around the US-China trade war and also partly because of the monetary policy of the US Federal Reserve. We would probably have postponed the bond issue, but we had not been very active in any currencies and we didn’t want to end the month without having done any funding. The resulting deal had five tranches, including both senior preferred and senior non-preferred notes. It was our biggest ever bond issue in the Japanese yen market, at ¥163.6bn, and the demand was definitely tilted towards the senior non-preferred bonds. At the time we were paying a high single digit ‘diversification premium’ over our euro levels —except for the 10 year senior non-preferred tranche where we had an arbitrage versus euro.
Spread levels then tightened quite a bit between January and June. For our deal in June we paid a smaller ‘diversification premium’ compared with the January issue — it was in the mid-single digits rather than in the high single digits. The June bond issue was smaller though, at ¥62.1bn overall. Only ¥6.5bn was in senior preferred format and ¥55.6bn was in senior non-preferred, so again the demand was tilted towards the non-preferred notes because they give more yield to investors.
GlobalCapital: Lloyds and Société Générale have both been active in the yen market this year: how have you found funding conditions?
Peter Green, Lloyds: Overall, I’d describe the conditions in the Japanese yen market as supportive and pragmatic. Funding volumes seem to be lower, but the investor base continues to be supportive to trades despite the more challenging macro backdrop. For instance, when we did our trade it was against a backdrop of UK specific and global macro headlines. The investors stayed the course though and we were delighted with the outcome we achieved.
The main change in conditions this year has been the divergence in demand from investors for TLAC versus MREL. G-SIB issuers have met with lower levels of demand for senior non-preferred or holdco issuance, given the higher risk weights that apply to TLAC issuance versus MREL product — regional support for TLAC trades has generally been lower.
Vincent Robillard, Société Générale: This is true that the regulatory change introduced by the Japan Financial Services Agency in April this year had an impact on demand for TLAC eligible instruments, especially from regional accounts — regional banks, Shinkin banks and regional public funds. As a consequence, we have observed a decrease of the international Yen market so far compared to the same period in 2018.
Having said that, the participation from central accounts has remained strong and the yen market continues to offer solid financial conditions. As an example, we successfully tapped this market in February with the Group’s first Euroyen Senior non-preferred transaction: a ¥96.2bn five and 10 year offering, enabling Société Générale to broaden its investor base, especially with regional investors ahead of the FSA change of guidance.
GlobalCapital: Is it therefore fair to conclude that, overall, the introduction of new risk-weight requirements has weakened demand for TLAC paper in Japan? Since April, some bank treasury investors have had to apply up to a 150% risk-weight to purchases of TLAC-eligble senior bonds.
Robillard, Société Générale: As expected, the introduction of higher risk-weights for TLAC has resulted in a decrease of the demand from banks, in particular regional banks. On the contrary, we have so far not seen any material change in the behavior of central investors or banks, who keep investing in public TLAC issuance.
Charbonnel, BPCE: The introduction of higher risk-weights for bank investors in TLAC products had a negative impact on our deal in June. We could see that in terms of the number of accounts placing orders in January compared with how many placed orders in June — there was nearly a 70% drop in the number of bank investors in the book. That is pretty significant.
But it was not the only reason we saw such a significant drop in demand. Spreads were much, much tighter in June than they were in January, meaning the yield was less attractive for all investors, including the bank investors. So the introduction of higher risk weights did affect our second deal, but it wasn’t the only factor. I would say it was 50%-50% between the two.
GlobalCapital: What about for issuers that are subject to MREL rather than TLAC? Japanese bank investors can still apply a 20% risk-weight to MREL paper, so are these types of bonds benefitting in the yen market in 2019?
Green, Lloyds: There has been a definite divergence between TLAC and MREL issuance this financial year given the different risk weight treatment given to loss absorbing product issued by G-SIBs versus D-SIBs.
Bank — particularly regional bank — participation in TLAC trades has been lower than it was in the previous tax year, whereas for MREL issuance, regional banks have continued to support trades in good size.
Lolli, Intesa Sanpaolo: We are under MREL rules rather than TLAC, but up until now we have not had any need to issue non-preferred senior debt. Our knowledge about the risk-weight situation is therefore only second hand.
Nonetheless the message we are getting is that there will be some investors, particularly the regional banks, which are going to be hit by the new regulations in Japan and so they will move more towards MREL debt or preferred senior bonds. There are also going to be other investors like pension funds, life insurers and asset managers that will not be affected and will continue to invest in both MREL and TLAC.
Charbonnel, BPCE: I would say that there is definitely still demand for MREL but also for TLAC paper. It is senior preferred where we are seeing less demand, simply because the spreads are so tight and the yields are so low.
GlobalCapital: With bond yields stuck at such low levels in Japan, are Japanese investors becoming less risk averse than they have been in the past?
Green, Lloyds: I’m not sure we are seeing signs of investors becoming less risk averse but the challenges of a low rate environment are definitely being exacerbated. Japanese investors generally have a strong track record of staying the course despite increasingly difficult market conditions to navigate. Whether this makes them more risk averse is up for debate – I’d argue they remain reliable in difficult market conditions and supportive of credits they value and understand. The resilience of Japanese investors supports the investment we make in investor relations work both in Tokyo and the regions.
Robillard, Société Générale: Despite a more risk averse approach than in other regions, Japanese investors have progressively increased over the last years the volume of liquidity invested in TLAC eligible debt. Nevertheless, the current market headwinds and regulatory changes might potentially impact this past trend.
Charbonnel, BPCE: The introduction of new risk-weights has definitely been a big issue for bank investors, which has affected their appetite for TLAC senior debt. But yield is also a very big consideration for Japanese accounts. In general they will tend to be okay with senior non-preferred because of the yield on offer.
GlobalCapital: What about riskier products like tier twos and additional tier ones? Have investors also been warming towards these asset classes?
Charbonnel, BPCE: There is still less demand for tier two. When we have issued tier two in the past we saw that interest in the product was pretty limited. At the same time, there is no market in Japan for AT1. No one has really made the effort to market AT1s to Japanese investors and the product is also pretty complex. From that point of view I would say that the Japanese market remains pretty conservative.
Robillard, Société Générale: In the tier two space, we have observed regular demand from pension funds, lifer insurers and corporate investors. Regarding AT1, Japanese institutional investors are facing regulatory constraints preventing them to take exposure to those products. The appetite for AT1 out of Japan remains then limited.
With the recent tightening of Japanese yen swap rates, there might be a potential for increasing demand from yield-hungry investors.
Green, Lloyds: So far there have been limited examples to substantiate this thesis but, in a world of lower rates, it would certainly be logical that investors have the same “hunt for yield” as other investors. Also, given the risk weight treatment of TLAC debt versus MREL debt, the Japanese investor base could well be paid to diversify into tier two product versus senior — holdco or non-preferred. This could be especially pertinent for Australian issuers who have traditionally been regular issuers in the Samurai market for senior debt but now have tier two requirements to satisfy as part of APRA’s [Australian Prudential Regulation Authority] approach to loss absorbency.
GlobalCapital: How have Japanese investors responded to the recent uncertainty around the global economic and political outlook?
Charbonnel, BPCE: Our experience is that the Japanese market is less sensitive to headlines compared with other markets. But they are not completely insensitive to what is going on. I remember Crédit Agricole was marketing bonds in yen shortly after the Italian election, which sparked a lot of volatility. But still they managed to print a deal.
GlobalCapital: There has been a lot of continued uncertainty around the political situation in Italy. As an Italian issuer, what has Intesa Sanpaolo made of the perception of Japanese investors during this period?
Lolli, Intesa Sanpaolo: Japanese investors are not particularly speculative. They prefer to buy and hold and they don’t like volatility, so they are (a bit) concerned about political uncertainty and the volatility that this can bring. This is perfectly understandable, especially given the small role that hedge funds play in this market.
For this reason we think it is very important to meet with Japanese investors and indeed over the past three years we have conducted non-deal roadshows on a regular. As a result of this we have seen Japanese investors putting in more work to try and understand the political environment in Italy. They have a growing willingness to analyse political developments in the country so that they can be ready to step in when the situation is acceptably stable. Their attitude towards Italy is very constructive.
GlobalCapital: BPCE raised ¥163.6bn with a Samurai offering in January but switched to the Euroyen format for a ¥62.1bn deal in June. Why did you decide to issue a Euroyen deal instead of a Samurai for your second this year?
Charbonnel, BPCE: We have been very loyal customers of the Samurai market. Since December 2012, we have only done Samurai bond transactions in Japanese yen. The main reason for switching to Euroyen had to do with the flexibility you can get in terms of timing. There is a very lengthy process of legal documentation work you need to go through to do a Samurai bond, and so we wouldn’t have been ready to issue at the time we wanted to come to the market this June. Doing a Euroyen deal means you are issuing off of your EMTN programme, so you can be much quicker in coming to the market. We wanted that flexibility because we were trying to avoid competing supply, which can affect the spread level and the size you are able to achieve in the market.
GlobalCapital: Do you think you would have been able to issue a larger deal in June if you had decided to return to the Samurai bond market?
Charbonnel, BPCE: The fact that we switched from issuing Samurai to Euroyen in June had nothing to do with the fact that we ended up having to issue a smaller transaction. In our view we only lost a small amount of demand because of the choice of format.
Going forward, whenever we consider doing a public issue in the Japanese yen market, we will either do a Samurai bond or a Euroyen deal. We certainly won’t forget about the Samurai format — we have Samurai bonds outstanding so we already have to do all the disclosure work. It will simply depend on whether or not we need flexibility in terms of timing. But we don’t really see any specific advantage of the Pro-Bond format over Samurai or Euroyen deals.
GlobalCapital: What about other issuers, is the Pro-Bond format becoming more of interest alongside Samurai bonds and Euroyen deals?
Robillard, Société Générale: The Pro-Bond format with its English documentation definitely offers a less time consuming option than the Samurai market to issuers contemplating to access the yen market for the first time. However, the upsides are more limited for frequent issuers like Société Générale active in Samurai and Uridashi bonds with documentation already established.
Green, Lloyds: Ultimately, for issuers without Samurai capabilities, both have application but also limitations. Samurai docs remain the gold standard and give us access to the full extent of the Japanese investor base. In a good market, investors will accept Pro-Bond and Euroyen but in more difficult market conditions then the ‘gold standard’ is preferred. Clearly, it would be beneficial for international borrowers if some of the ‘idiosyncrasies’ of the Japanese yen market aligned more to the US dollar or euro market, but some changes can be glacial in the making.
GlobalCapital: Intesa has sold two Pro-Bonds, the first of which was for ¥46.6bn but the second of which was for a total size of just ¥13.2bn. Is there plenty of appetite for deals in the Pro-Bond market?
Lolli, Intesa Sanpaolo: The Samurai market is the most liquid and the most prestigious in Japan. But given that we are a newcomer and investors are not yet willing to buy huge deals from us, the Samurai market is pretty much off the table. It would be too expensive and too complicated to set up a programme. Our Tokyo Pro-Bond is quite similar to a Euroyen. The language is English and they are listed in Tokyo and Luxembourg.
The reduction we saw across our two Pro-Bonds is not due to the type of instrument we chose, it was more related to the political situation in Italy. But we were encouraged to see the diversification of our investor base in Japan, especially in terms of the regional, Shinkin banks. Last year one of them was involved but this year there were three. This is important because it is a sign that our name is better known in the country and it shows that there is a growing interest among regional banks to open their doors to new issuers.
GlobalCapital: How important is it for issuers to gain access to regional bank investors?
Robillard, Société Générale: Japan is a deep and core market with central accounts as anchor investors but also with many other important regional investors such as regional banks and Shinkin banks. Due to their number, having access to them is key to diversify the investor base and for the success of the transactions issued in Japan.
Green, Lloyds: As an issuer, we have seen no downside and only upside potential in terms of accessing regional investors in Japan. For the past few years, every roadshow to Japan has included days in the regions to update investors there on the Group’s credit story and funding plans. We have seen this as a worthwhile investment of time and effort and this has been rewarded in investor sponsorship for our deals.
Charbonnel, BPCE: It may not be so important for all issuers, but to us it is really important. Whenever we do a roadshow in Japan, we typically spend three days of the week in Tokyo and two days in various parts of the country to visit regional investors. We are the largest issuer in the Samurai market, so we have to look for further diversification. The Japanese market is obviously diversification from the euro market for us, but we feel we need to access regional investors so that we can also get some diversification within the yen market as well.
GlobalCapital: Are you happy paying a ‘diversification premium’ to do deals in yen?
Charbonnel, BPCE: We do not require an arbitrage when we are contemplating a bond issue in another currency because we value very much investor diversification, but we will only take the extra cost as long as it is in a single digit range.
GlobalCapital: How important is it for other issuers to gain a pricing advantage when going to yen?
Green, Lloyds: While we remain price sensitive as an issuer, we are more focused on the long-term benefits of investor diversification than short-term pricing arbitrage. We would rather be seen as an issuer that is invested in the strategic importance of the regional market and the local investors than one that is transient and is only focused on the pricing benefits that could be extracted from this market. The Japanese investor base is generally very reliable and stays the course on trades, even amid deteriorating market conditions globally, so we see pricing arbitrage as long term destructive to our engagement with this strategically important market.
Lolli, Intesa Sanpaolo: When you are entering a new market and offering paper with limited liquidity, it is perfectly understandable that investors want to have a bit of a pick-up in terms of yield. We have therefore cheaper ways of raising funding, but that is absolutely reasonable.
At the moment our purpose it is to diversify our investor base knowing that in the future, when we may be placing larger deals in yen, we could put more emphasis on the pricing. For now it is not important for us.
This is a strategic market for us. We see an incredible potential in yen and so we want to continue to make an effort to be there more and more, without being too focused on short-term results in terms of size or pricing.
GlobalCapital: What role does the yen market play in your overall funding plans?
Green, Lloyds: The Japanese yen market remains strategically important to the group as we look to maintain a diversified funding mix across investors, currencies and markets. The Japanese investor base is generally one that doesn’t traditionally participate in other trades that we do — with one or two exceptions — and pricing is normally in line with what we could achieve in other global markets so is additive without having to reprice our curve.
Charbonnel, BPCE: When looking at the unsecured part of our funding, we would typically be doing around 10% of our unsecured MLT [medium and long term] funding in Japanese yen. This year we have a much heavier weighting in the currency, with around 20% of our unsecured MLT funding in yen. One of the reasons for this is that US dollars have been a lot more expensive than euros for pretty much all of 2019, so we have issued much less in that currency than we would normally have done. We haven’t done any public issues in US dollars so far this year.
GlobalCapital: Alessandro, you mentioned earlier that this has been ‘the year of the euro market’. Has that changed the role of yen in your funding plans?
ALolli, Intesa Sanpaolo: The euro market cannot be as strong as it has been every year and though the dollar market is very reliable for size, it is structurally more expensive to issue there. So there is going to be room for Japanese market and we believe that this will only increase going forwards.
I have the feeling that the appetite of Japanese investors for international deals is growing. We have seen that these accounts have been buying a lot of French and German paper, but they have also now been buying a lot of debt from Italy. Given that yields are sinking globally, we can see there is going to be more demand for bonds issued by European peripheral countries, where the issuer is strong and the terms of the deal are fair.
GlobalCapital: Would you consider going down the capital structure to issue riskier products in yen?
Lolli, Intesa Sanpaolo: We don’t see any reason not to consider issuing non-preferred senior debt in Japan at some point in the future. But we are still on a learning curve in the yen market at the moment and we don’t want to go down the capital structure and force investors to take a bit more of a risk on our business. Our strategy is to have a long term relationship with Japanese accounts, so we want avoid pushing or pressing investors to take decisions they may not be comfortable with.
GlobalCapital: Is there growing appetite among Japanese investors for bonds linked to environmental, social and governance (ESG) criteria?
Charbonnel, BPCE: We have been quite active in Japan with social bonds, but we haven’t done much in terms of green issuance. We are looking at the opportunity of doing green issuance in Japan but this isn’t really our top priority. We would probably consider the euro market before yen when doing green bonds. That’s because it looks like Japanese investors are more prepared to buy social bonds than some European investors, particularly in the Nordic countries, which are traditionally big buyers of green bonds. But in Japan we don’t see a clear difference in terms of demand for green or social bonds.
Green, Lloyds: Green bonds are not really a new concept for Japanese investors or the Japanese yen market, with this product having been issued by a number of issuers over the past few years. As we are seeing in other markets, there is definitely more of an awareness of green bond opportunities in the Japanese yen market and we are likely to see this becoming more popular as investors become more sensitive to investing specific SRI funds into bonds that adhere to the Green Bond principles, and also as issuers look at ways to diversify their investor base across markets.