Historically, there has been a conspicuous imbalance between supply and demand in the international market for Japanese corporate debt. As in previous years, strength of pent-up international demand for Japanese corporate issuance was illustrated in July when Mitsubishi Corp returned to the market with a $500m five year transaction led by Citi, JP Morgan and Morgan Stanley.
This built on a track record that Mitsubishi Corp has been cultivating since September 2010, when it issued a $500m five year bond, indicating at the time that it intended to return to the dollar market on a regular basis.
This year’s bond issue was priced at 150bp over US Treasuries, compared with initial guidance of 165bp. That represented a modest premium to the secondary market, and underpinned demand of $3bn from over 200 accounts. Demand was led by Asia, which accounted for 76% of distribution, with the balance taken up in Europe. Some 42% of the bonds were placed with asset and fund managers, with central banks and sovereign wealth funds buying 25%, banks 22%, private banks 5% and insurance companies, 6%.
Daisaku Fujikawa, co-head of capital markets origination at Citi in Tokyo, says that this year’s dollar offering from Mitsubishi Corp was sold without having been roadshowed, either physically or virtually. “This demonstrated that investors are already very comfortable with the Mitsubishi Corp’s credit story, and that the company has achieved its objective of being regarded as a regular issuer in the dollar market,” he says.
The relative scarcity of Japanese corporate issuance in the international market also supported the success of a long overdue return to the dollar market by Japan Tobacco (JT), also in July. “Japan Tobacco issued in Eurodollar format in 1999, but this was its debut as far as US investors were concerned,” says Fujikawa, who’s bank joint-led the $500m five year 144A/Reg S transaction alongside BAML.
The scarcity value of the JT trade was reflected in its pricing. Initial price guidance was at 85b-90bp over US Treasuries, with final pricing set at the tight end of the revised range of 75bp-80bp. According to Fujikawa, that did not just mean that JT was able to price inside peers such as Philip Morris; it also meant that the borrower funded through the JGB curve on a swap-adjusted basis.
“The Japan Tobacco issue was a great success,” says Reiko Hayashi, head of debt capital markets at BAML in Tokyo. “It priced tighter than outstanding comparable issues even though its rating is lower.”
Total orders for the JT issue reached $2bn from 150 accounts, with 77% of the bonds placed in the US, 15% in Europe and 7% in Asia. Fund managers accounted for 86% of allocations, banks for 7% and insurance companies for 5%.
Although JT is unlikely to be a regular international issuer, bankers expect it to return to the dollar market sooner rather than later. “JT is expected to maintain and further strengthen the diversification of its financing measures plans because more than half its revenue now comes from outside Japan,” says Hayashi.
Hard bid for SoftBank
Perhaps the most striking manifestation of the strength of international demand for rare exposure to Japanese corporate credit, however, was the response of investors to the two-tranche $3.3bn issue from SoftBank in April, which supported the financing of its ¥1.8tr ($21.6bn) acquisition of 70% of the US mobile phone business, Sprint. This was split into a $2.485bn seven year bond at a 4.5% coupon, or 339bp over Treasuries, and a €625m tranche, also with a seven year maturity, priced at a 4.625% coupon, or 395bp over Bunds. Initial guidance was 4.5%-4.75% for both tranches, with strong demand allowing the borrower to increase the size of the overall transaction from an originally planned minimum of $2bn.
Deutsche Bank was the global co-ordinator for the SoftBank transaction, with Barclays, Crédit Agricole, Mizuho and Nomura as joint bookrunners, and BAML and Morgan Stanley additional joint books for the dollar tranche.
Roughly two-thirds of the SoftBank transaction was taken up by high yield funds, reflecting the fact that although the company was rated BBB/Baa3 at the time of the issue, it was on review for downgrade at Moody’s and S&P. Both agencies downgraded Softbank immediately after the completion of the Sprint acquisition, with S&P revising its rating to BB+ and Moody’s downgrading it to Ba1. Explaining its two-notch downgrade, Moody’s commented in July that the ratings action reflected its view that the debt-financed acquisition would “significantly weaken SoftBank’s financial flexibility”.
The downgrade, said Moody’s, also took account of “the possibility that SoftBank will have to extend additional finance to help Sprint execute its large capital expenditure programme of $16bn for 2013 and 2014.”
“The SoftBank transaction was remarkable not just because of its size,” says Hayashi at BAML. “It was also remarkable because the announcement of the planned downgrade had no impact on demand, which still allowed us to price at the tight end of guidance.”
SoftBank has also been very active in the domestic market, complementing its dollar bond with a jumbo ¥400bn of retail-targeted bonds in June. This transaction was the principal reason why the domestic issuance spiked up sharply in the first quarter of this fiscal year. Hisato Oiwa, managing director and head of capital markets at SMBC Nikko in Tokyo, says that in Q1 FY2013 plus July, domestic corporate bond issuance reached ¥4tr, which compares with approximately ¥8.1tr for the whole of FY2012. Indirectly, this rise appears to be a result of Abenomics, with Oiwa explaining that a number of Japanese companies chose to lock in favourable funding costs in the early months of this year in anticipation of rising rates given the government’s 2% inflation target.
Internationally, meanwhile, bankers are hopeful that there will be more issuance from Japanese corporates, with Fujikawa reporting that every year his team has been receiving more enquiries from an increasingly diverse range of issuers. While there will be sporadic corporate issuance from Japan, however, bankers expect volumes to remain low relative to the size of the economy, largely because even Japanese companies looking to make big-ticket acquisitions have balance sheets that are heavily loaded with cash. “The corporate sector is still highly liquid, which limits the potential for bond issuance,” says Hiraku Kusaka, executive director of international syndicate and debt capital markets at Nomura in Tokyo.
For corporates with cash-heavy balance sheets and the offer of cheap local funding, one international alternative that holds little or no appeal is the US private placement market. “At the start of this year we spoke to a number of companies rated double-B or below, or unrated, about the benefits of US private placements,” says Fujikawa. “They all had good stories to tell, but the cost of issuing in the US PP market is too high relative to other funding sources.”