Good things are worth waiting for, and intermediaries as well as investors in the Samurai market did more than their fair share of waiting for new issuance in the first four months of this calendar year. The early months of the calendar year is generally a quiet time anyway for the Samurai market, as Japanese investors prepare to close their books in advance of the end of the fiscal year. But the early part of 2013 was an especially barren period for the new issue market for several other reasons.
Foremost among these was the dizzying volatility in the basis swap following the announcement by the Bank of Japan of its shift in monetary policy at the start of April. Another was the complete absence from the market of Australian banks, which in recent years have been among the largest and most regular borrowers in the Samurai sector.
In the first few weeks of the new fiscal year, borrowers made quick work of making up for lost time, with a burst of issuance helping to lift total volume in the second quarter of the calendar year to almost ¥600bn. By early August, total issuance for the calendar year (including JBIC-guaranteed and Pro-Bond issues) reached just over ¥880bn, compared with ¥2.22tr for the whole of 2012 and ¥2.14tr in 2011, according to Nomura calculations.
Rabo to the rescue
In the absence of the Australian banks, it was left — as it usually is — to the prolific Rabobank to re-open the market, which it did in the middle of May with a four-tranche trade raising ¥101.5bn. Led by Daiwa, JP Morgan, Nomura and SMBC Nikko, this was the first non-guaranteed Samurai since a ¥30bn Woori Bank transaction at the end of January.
Steve Apted, head of debt syndicate at SMBC Nikko in London, describes Rabo’s May trade as the standout of the year so far not just because it re-opened the market. “The Rabo issue also repriced the market, issuing the five year tranche at 14bp over swaps, compared with 40bp on its previous deal in October 2012,” says Apted. “Those spreads were eye-opening to a number of other borrowers.”
It was this re-pricing, say bankers, that allowed Nordea Bank to spearhead a rush of Nordic issues shortly after the Rabo transaction that added momentum and diversity to the revival of the Samurai market. Led by Daiwa, JP Morgan, Mizuho and Nomura, the ¥91.2bn deal achieved the tightest pricing in the Samurai market since the financial crisis. The ¥28.1bn three year tranche was priced at 8bp over swaps with the ¥48.8bn five year piece coming at 11bp over and the smaller FRNs offered at 18bp and 21bp over yen Libor respectively.
Nordea’s transaction in May was its second in the Samurai market, delivering on the pledge that it made in 2012 to be a regular issuer, and was the first of a trio of transactions from Nordic borrowers during the early summer, which added to the diversity of supply. In June, Pohjola Bank priced a ¥30bn three-tranche issue via Daiwa, Nomura and SMBC Nikko, which was its debut and the first Samurai from a Finnish non-sovereign status bank issuer.
Soon afterwards, Svenska Handelsbank added to the smorgasbord of Nordic borrowers with a ¥50.5bn four-tranche trade via BAML, Mitsubushi, Mizuho and Nomura. Again, the Svenska pricing tested new lows, with the three and five year fixed rate tranches coming at 7bp and 10bp over swaps respectively.
The flavour of European bank issuance in the Samurai market this year has not been exclusively Nordic. Following debut issues in 2012 for Société Générale and BPCE, Crédit Agricole added to the roster of French bank issuers with a ¥65.3bn five-tranche issue. Led by CA, Mitsubishi, Nomura and SMBC Nikko, this was the only European bank transaction this year to have incorporated a shorter two year tranche.
In terms of pricing, the most eye-catching bank debutant in the Samurai market this fiscal year, however, has been HSBC, which came to the market with a two-tranche ¥54.9bn deal via itself, Mitsubishi UFJ Morgan Stanley and Mizuho in June. The ¥37.7bn five year fixed rate tranche of this deal was priced at just 6bp over yen swaps.
“The HSBC deal was one of the keenest-priced Samurais ever in terms of spread versus yen swaps,” says Richard Tarn, executive director of European primary debt markets at Mizuho International in London. “You need to go back to 2007 when BNP Paribas issued at plus three for a tighter spread. But that was a three year deal that was capped at ¥30bn, so it’s not directly comparable with the HSBC five year.”
Bankers say that the razor-thin pricing of deals such as the Handelsbanken and HSBC trades has possibly established a floor for pricing in the Samurai space. “Theoretically if a triple-A supranational were to issue, it would price as a JGB surrogate, as EIB has in the past in the Euroyen market,” says Koh Kawana, managing director and head of global fixed income capital markets at SMBC Nikko in Tokyo. “But it is difficult to see pricing going any lower than yen Libor for FIG issuers.”
With pricing testing new lows in the FIG market, bankers have been encouraged by an uptick in issuance from the sovereign sector. For example, the market for unguaranteed sovereign bonds continues to expand, with Mexico standing out for the progress that it made in the yen market since coming to the market without a JBIC guarantee for the first time in May 2012. Its ¥80.6bn three tranche trade, which was led in July by Daiwa, Mizuho and Nomura, achieved tighter pricing in a larger size than its first unguaranteed trade, and also added a new six year tenor which was set up on a reverse enquiry basis.
The Mexico transaction was very warmly welcomed by Tokyo-based investors eager to see more variety in the Samurai space. “It was a very important step for the Samurai market that an emerging market issuer credit such as Mexico was able to come to the market,” says Naoyuki Takashina, joint head of international debt capital markets at Nomura Securities in Tokyo. “The Mexico deal attracted new investors, as well as many who had participated in its Samurai the previous year as Mexico’s credit story has become more broadly recognised. The attractive relative value versus the US dollar curve also attracted some investors outside of Japan.”
It is an open secret that while it did not guarantee Mexico’s most recent Samurai, JBIC invested in the issue. “Under the GATE scheme, JBIC can guarantee as well as buy Samurai bonds, although it can’t do both on the same issue,” says one banker. He adds that of the sovereigns that have previously issued under a JBIC guarantee, Turkey is perhaps the most obvious candidate to follow the same issuance trajectory as Mexico, coming to the market on a standalone basis with JBIC giving momentum to the deal at the primary level.
Among other sovereign issuers, Slovakia made a long-awaited return to the market in June, with a ¥30bn Samurai via Daiwa and SMBC Nikko. Although Slovakia had issued in the 1990s via the central bank, this year’s Samurai was strictly speaking a debut trade because it was the first time it had issued under the republic’s name.
“We have been talking to the Slovak Republic about the benefits of yen funding since 2000,” says Vince Purton, head of debt capital markets at Daiwa Capital Markets in London. “But in the last two years it has bought into the importance of diversification, issuing in dollars and Swiss francs and now in yen. On the roadshow, it made it clear that it intends to return to the Samurai market on a regular basis, which was appreciated by investors.”
Another notable sovereign Samurai in July was the return of Tunisia to the market with a ¥22.4bn JBIC-guaranteed issue led by Daiwa and Mitsubishi UFJ Morgan Stanley. This was a follow-on trade from Tunisia’s debut in the JBIC-guaranteed market — and the first from any African borrower — in December 2012.
Tunisia’s brave return
The timing of the Tunisian issue was brave, coinciding with heightened tension in Egypt and launching days after the assassination of Tunisia’s opposition leader, Mohamed Brahmi. “Even the lead managers were surprised by the success of the Tunisia deal,” says one banker. “Tunisia deserves commendation for taking the reputational risk of going into the market when it did. But the success of the deal is a sign of how much the Japanese investor base has matured in the sense that it is able and willing to do the credit work on a borrower like Tunisia.”
Others say that the strength of demand for the Tunisian Samurai — and for other deals guaranteed under the GATE programme — was driven by investors who were focused more on the JBIC guarantee itself, which covers 95% of the deal, than on the Tunisian credit. “Many investors were attracted by the spread of 100bp over swaps for a credit which was regarded as 95% JBIC risk,” says Kawana at SMBC Nikko. “In the domestic market, JBIC prices at JGB plus single digits.” (see page 11 for more details)
Beyond the sovereign sector, another group of borrowers that have added a diversification to the Samurai market is US banks, which had been absent for a while chiefly because of uncertainty over the Foreign Account Tax Compliance Act. JP Morgan broke the ice in June, with a ¥105.6bn four-tranche issue that included a rare 10 year tranche.
The following month, Citi also returned to the market with a two-tranche ¥75bn deal. “Citi was delighted with the deal, which was its first for six years and was priced flat to its dollar curve,” says Apted.
Another striking element of the Citi Samurai, and one that spoke volumes for the increasing sophistication, maturity and adaptability of the Samurai investor base, was that it took advantage of a recent dispensation allowing for English language documentation.
More broadly, says Sam Amalou, head of debt capital markets at SMBC Nikko in London, the return of the US banks has been another welcome vote of confidence in the market. “Up until the crisis the US banks were the dominant issuers, but since 2007 there has been little issuance from the US, so it’s good to see them back,” he says.
The re-emergence of the US banks together with rising issuance from Nordic and French financials has helped to compensate for the continued absence of the Australian banks, which are not expected to return to the market for the foreseeable future. “To achieve a competitive cost of funds in the Samurai market, Australian banks would have to issue through JGBs, which would make no sense to investors,” says Shun Nakamura, director of debt capital markets at Daiwa Securities in Tokyo.
Another group of FIG issuers that had been increasingly active until recently are the Korean banks. “We’ve only seen two issues from the Korean banking sector this fiscal year, from KDB and Shinhan, which is fewer than I expected,” says Hiroyuki Kinoshita, head of international debt syndicate at SMBC Nikko in Tokyo. “But with concerns over North Korea receding, and spreads on Korean banks tightening in the secondary market, and continuous investor demand for Korean credit, I expect to see more issuance later this year.”
Others agree. “There are a lot of redemptions due from Korean banks over the next year, so I would expect to see a revival of issuance as these bonds are refinanced,” says Hidechika Fukushima, managing director of debt capital markets at Mitsubishi UFJ Morgan Stanley in Tokyo.
That will be welcome news to the community of Samurai investors, which bankers say continues to expand, chiefly because investors have so few alternatives to generate yield. “Shortage of supply at the long end of the JGB market together with higher volatility has been forcing investors to look at the shorter end of the credit market,” says Tarn at Mizuho. “And because many are unable to take currency risk, the Samurai market is an appealing alternative.”
Daiwa’s Purton says that there is very strong evidence of the expansion in demand for Samurai bonds. A recent Daiwa survey, he says, found that there has been a 33% increase in the number of regional banks that are now willing to buy Samurai bonds, and a 40% rise in the number of banks now considering investing for the first time.
At the same time, the most regular borrowers in the market are constantly looking to explore new pockets of demand, chiefly among institutions outside Tokyo. Rabobank, for example, frequently conducts non-deal roadshows in Japan aimed at building relations with regional banks. At SMBC Nikko in London, Amalou says that this strategy paid clear dividends in the most recent Rabo deal. “There were about 140 orders in the book, and even allowing for multiple orders there were more than 100 investors in the deal, which is very granular for a Samurai,” he says.
Borrowers have also been reaching out to some of the smaller institutional buyers. When Nordea roadshowed its recent Samurai, for example, it added a one day visit to some of the regional accounts that may not otherwise have participated in the deal. “Investors appreciate these visits,” says one banker. “You have to be a committed issuer to be willing to put the time and effort into visiting regional banks that may only add ¥1bn or ¥2bn of aggregate demand.”
Daiwa’s Nakamura says the clearest reflection of this growing investor base is that the success or failure of individual transactions is no longer hostage to a small group of large Japanese institutional buyers. “In the past pricing used to be dictated by one or two of the largest domestic investors,” he says. “The depth of the market today is such that issuers can still price very successful deals even if they are not supported by the largest buyers.”
While the overall demand dynamics continue to be very encouraging pointers for future growth in the Samurai market, bankers say that there are one or two notable areas where supply continues to be disappointing. One of these is the corporate market, where the only borrower to have issued with any regularity is Renault, which is regarded almost as a quasi Franco-Japanese borrower because of its holding in Nissan. Other corporate borrowers that have issued in the Samurai market have tended to do so on a one-off basis.
“Japanese investors would definitely welcome more corporate issuance,” says Fukushima. “But the economic advantage of the Samurai market for borrowers without a yen requirement is rather limited under current market conditions.”
Another source of some disappointment, in terms of the new borrowers it has attracted to the yen market, is the Pro-Bond initiative. To date, this has seen a handful of filings — with India’s ICICI the most recent — but only one issuer, with ING having launched two highly successful issues.
While institutional demand for Samurai bonds shows no sign of diminishing, neither does retail appetite for the attractive yields offered in the Uridashi market. “The most notable trend we’ve seen this year has been the increased demand for structured Uridashi,” says Nakamura at Daiwa. “Equity-linked notes, such as Nikkei-linked, have been very popular because of the strong performance of the stock market as well as reinvestment demand related to increased called bonds.”