Japanese bond issuance booms in wake of pandemic
The Japanese bond market had a blow-out year in 2020, despite the ongoing pandemic and related volatility. With 2021 already characterised by eager borrowers and large acquisition financing activity, DCM bankers are preparing for another record setting year. Morgan Davis reports.
The past year has been a volatile one for capital markets around the world. Businesses in Japan were battered and many permanently closed. The country was forced to postpone its 2020 Olympics, and uncertainty remains around how safe it is for the event to be held this summer, as planned. Since the start of 2020, Japan has reported more than 500,000 cases of Covid-19, resulting in around 9,400 deaths.
But the difficult backdrop did not hold back Japan’s bond market. Japanese borrowers issued ¥25tr ($228.4bn) of bonds in 2020, surpassing the ¥24tr raised in 2019, according to Mizuho.
“Japan’s bond market actually endured the crisis relatively well,” Masanori Kazama, head of inter-national DCM at Nomura, said during a roundtable hosted by Global-Capital in April.
“The new issue market was shut in mid-March and rates fell to historical lows. After the monetary easing policy was put in place, the new issue market stabilised — and it actually became a good year for many issuers.”
The trends characterising the Japanese bond market are largely in line with the global market. Issuers are now benefiting from a strong credit market, accommodative central bank policies and a low cost of issuance, said Tomonori Yoshida, head of debt capital market for Japan at Crédit Agricole. "Investors are also looking for opportunities and green, social and sustainable labelled borrowing, in particular, is taking off," he said.
This should support another blow-out year for Japanese bonds. “We estimate that this year the total issuance will continue to beat last year’s level,” said Kazuhiko Hayashi, joint head of the products business division at Mizuho.
Rather than hindering bond transactions, the pandemic has encouraged new approaches to fundraising. Some corporate borrowers are seeking increased funding to compensate for their pandemic-related business losses, said Hayashi.
Others have tweaked their funding plans. Mizuho reported that short-dated borrowing dominated last year, with about 66% of the 2020 bonds having a tenor of five years or less, up from 51% the previous year. This is also linked in part to the market volatility. The Japan Bank for International Cooperation, for example, had planned to sell a 10 year bond in February 2020, but instead opted for three to four year maturities, Yoshitaka Hidaka, director, capital markets and funding division, treasury department at JBIC, said during the GlobalCapital roundtable.
Increased foreign borrowing
Japan’s bond market boom has crossed borders, as international bond issuance is also on the rise. In 2020, Japanese borrowers raised about $116.2bn in public dollar and euro deals, according to Dealogic.
That shows a stark turnaround from 2019, when $81.7bn was raised in dollar and euro bonds. But even as the pandemic kicked off in the first quarter of 2020, bankers had predicted that foreign borrowing would tick back up, eventually surpassing the $105bn raised in dollars and euros in 2018 and the $114bn in 2017.
Now bankers are ready for another surge of international borrowing. In the first quarter of 2021, Japanese borrowers netted $46.3bn in the dollar market and the equivalent of about $3.6bn in euros.
Some of the early 2021 borrowing has come from issuers who wanted to do a transaction in 2020 but were delayed and unable to seize an available window until this year, said Yoshida.
Likewise, some borrowers rushed to the market to pre-fund in the first quarter and April, said Toru Kuraoka, managing director for Japan debt capital markets at Bank of America. Japanese bond sales also tend to slow in the second quarter, as the country’s fiscal year ends in March and annual reports are due soon after. That created a perfect storm of early 2021 issuance.
“Many issuers completed pre-funding ahead of potential risks to come later this year,” said Kuraoka. “Later this year may be slower, but that is subject to the market situation.”
Dollar issuance in the first quarter of 2021 also may be a bit skewed, as a large portion of the volume came from Nippon Telegraph and Telephone Corporation’s (NTT) $8bn bond sale in February. The five tranche trade was sold to support NTT’s $40bn plan to take mobile unit NTT DoCoMo private. Bankers repeatedly pointed to the NTT acquisition and related trade as the biggest contributor to the massive quarter one volume, rather than any significant market trends pushing companies to seek dollars.
NTT’s transaction is typical of Japanese issuers’ foreign currency deals, as borrowers usually seek international funding to support overseas businesses, mergers and acquisitions and environmental, social and governance (ESG) related projects. Companies with global franchises increasingly need dollars and euros, said Yoshida.
Other recent examples include Asahi Group Holdings, which turned to the international market for acquisition related funding this year, preparing a euro bond as this publication was going to press in April. The company, which last year acquired Australia’s Carlton & United Breweries, also tapped the euro market in October 2020.
Likewise, Toyota Motor Corp sold a $2.75bn triple tranche sustainability dollar bond in March, tapping the large ESG-dedicated buyer base in the West.
It helps that the pricing available in dollars has been attractive. “The US dollar market is in such good shape,” said Hayashi. “It provides good pricing and good size at the same time.”
Dollar funding may be even more attractive than domestic prices at the moment, added Hayashi, pointing to the spread compression for yen yields. As of April 13, the 10 year government bond yield was 0.103%. “There is still room for Japanese issuers to issue in dollars and enjoy some sort of savings compared with Japanese yen,” he said.
Hiromi Yoshiura, director, bond section, budget division, bureau of finance, Met Tokyo, noted during the roundtable that issuing costs are declining. “We recognise that spreads have considerably tightened on the back of the solid demand toward Japanese names, which provide relatively attractive yields amid the decline of interest rates,” he said.
International investors are eager to buy Japanese bonds, given how highly rated the companies usually are. “After Covid-19, we feel that global investors want to access the quality of Japanese credits,” said Bank of America’s Kuraoka. Japanese borrowers have a fairly conservative approach to their financing activities, making them a safe haven for global investors, he said.
Even with the recent increase in international issuance, Japanese borrowers are relatively rare in the dollar or euro market, adding to their appeal with investors, added Kaoru Adachi, director, rates and currencies structuring at Citi.
Turning offshore may also offer borrowers more flexibility with the size of their fundraising as well as expansion and diversification of the investor base for Japanese issuers, said Yoshida.
NTT, for instance, sold its dollar bond after tapping the domestic market for ¥1tr in December, allowing it to raise the massive amount of acquisition finance it needed. Nippon Life Insurance Co used the dollar market to raise $1.6bn from a single tranche hybrid deal.
Nippon Life sold a $1.15bn bond in 2020 as well, but its past domestic transactions have been less than $1bn each.
Despite the volatility that has plagued the market over the past 12 months, Japanese issuers have had no problem finding the funding they need and there are not any particular sectors facing serious refinancing pressure, the bankers agreed. There is little concern about defaults in Japan as the government has been supportive of companies in the wake of the pandemic, they added. That leaves Japan’s bond market on an upward trajectory for the rest of 2021.GC