ING Bank broke new ground with two remarkable pieces of fundraising from Japanese Pro-Bond investors, according to Dennis Haring, the bank’s vice president of long term funding.
The choice of the Pro-Bond was a straightforward one for ING, he says. “We always believed that the Samurai market would be a very interesting source of funding, but that the documentation requirements might be too cumbersome,” he says. “Borrowers in the Samurai market are required to submit several due diligence and comfort letters, and to provide disclosure in Japanese, which is time-consuming and costly.”
These costs are not trivial. Yasushi Katsuno, vice president of capital markets execution at SMBC Nikko in Tokyo, says translating documentation, for example, can cost several million yen — a large proportion of the overall documentation costs.
In its first visit to the Tokyo Pro-Bond market, in April 2012, it raised ¥50.7bn ($522m) in a two year transaction led by Barclays, Nomura and SMBC Nikko, with Daiwa and Mitsubishi UFJ Morgan Stanley co-leads on the issue, which was distributed to more than 40 local institutions.
It returned to the market in December with a spectacular ¥175.9bn transaction, the lion’s share of which was accounted for by a ¥164.5bn three year fixed rate tranche priced at yen swaps plus 70bp. This was complemented by a ¥11.4bn three year FRN at 80bp over three month yen Libor.
It was the largest ever deal from a European FIG issuer in the Japanese capital market and the largest from any European issuer since a ¥200bn Samurai from Sweden in 1993. It was also the seventh largest FIG issue in the yen market ever, and the largest since a ¥201.3bn deal from Westpac in February 2009.
Set up by Tokyo AIM in May 2011, the Pro-Bond initiative allows for private placements of securities to be offered to Japanese professional institutional investors only, with the issuer enjoying exemption from full securities registration. Fixed income issuers are required to be rated by at least one ratings agency, and to have their securities underwritten by at least one dealer named on the Lead Managing Underwriter List.
“Setting up the Pro-Bond programme, which we did together with Barclays and Clifford Chance, involved plenty of work, because we were all starting from scratch,” says Haring. “But now that the programme is up and running, maintaining it will be relatively straightforward.”
For ING, this is important, because Haring says it is committed to issuing regularly in the institutional yen market and, if possible, to doing so across the yield curve.
The perceived weaknesses of Pro-Bonds over Samurai bonds, have been well documented, says Haring, but none of these has been a problem for ING to date. Granted, the investor base may be narrower and is naturally concentrated more among the larger institutions comfortable with English language documentation. The size of December’s transaction, however, proved that the investor base is large enough to satisfy the issuance requirements of a borrower like ING.
Kenji Setogawa, a director at Barclays in Tokyo, adds that another dimension to demand for Tokyo Pro-Bond issues is the investor base outside Japan. “There was some demand for the ING bond from international investors who were attracted by the English language documentation,” he says.
Haring says there is no evidence that its Pro-Bond issuance is cannibalising the bank’s Japanese investor base for benchmark issues in other currencies. The sheer size of the sophisticated institutional investor base in Japan, says Haring, is such that institutions are unlikely to be close to exhausting their credit limits for individual foreign issuers.
No demand shortage
“The sophisticated investor base in Japan is substantial, so I would expect to see a number of the larger institutions active across a broad range of currencies,” says Haring. “But it is of course our goal to further diversify our investor base so we intend to put time and resources into meeting smaller institutional accounts and familiarising them with our name and the Pro-Bond product.”
If the investor base for Pro-Bond issues is smaller, albeit marginally, than for Samurais, bankers say that this has not had any negative effect on pricing. “There has been some discussion about relative pricing between the two markets,” says Setogawa at Barclays. “But soon after the ING transaction, Société Générale issued a Samurai at exactly the same level. The two banks have the same ratings and the pricing of their euro curves is similar, which indicates that issuers are not being asked to pay a premium for a Tokyo Pro-Bond issue.”
Given the demonstrable success of its two transactions, it remains a mystery why ING is the only borrower to have issued on Pro-Bond. Last October, SK Telecom of Korea listed a ¥70bn debt programme on Pro-Bond, stating October 5 to September 27 this year as the expected issuance period. However, it has yet to make any drawdowns on the programme.
Haring does not believe that a shortage of secondary market liquidity can explain why other borrowers have not taken the opportunity that Pro-Bonds offer to access the Japanese investor base. Although there has been no secondary trading in the ING bonds, Haring says that nor is there any meaningful turnover in the Samurai market.
“I recall asking bankers to show me some Samurai issuers’ secondary curves and they could not supply any,” he says. “It is well understood that the Pro-Bond market, like the Samurai space, is a buy-and-hold market.”
Bankers agree that there are minimal differences between the Samurai and the Tokyo Pro-Bond market in terms of trading volumes. “As it is a private placement market for professional investors liquidity will to a certain extent be reduced,” says Katsuno at SMBC Nikko. “But I would not describe the Samurai market as very liquid, either.”
Chicken and egg
A more convincing reason why Pro-Bond has yet to deliver on its potential, say bankers, is that issuers are not yet eligible for inclusion in the Nomura Bond Performance Index (BPI), which is followed by many Japanese institutional investors.
The exclusion of Pro-Bond issues from the BPI, say Tokyo-based bankers, is an infuriating chicken and egg conundrum. “The official comment from Nomura is that Pro-Bond issues won’t initially be included in the BPI, but that it will monitor how the market develops,” says Setogawa. There has reportedly been no indication from Nomura as to how many Pro-Bond issues it would like to see before they become eligible for inclusion in the BPI. So for the time being the dilemma is that borrowers are wary of issuing because of the index-ineligibility of Pro-Bond issues; but the index provider is unwilling to include these bonds in the benchmark until more of them have been issued. That looks like a stalemate.
Nevertheless, Haring is convinced that more programmes will be established over the next 12 months, allowing for the development of a broader and deeper asset class. “The number of underwriters on the lead managers’ list has more or less doubled over the last year, which suggests that banks are becoming more committed to supporting the growth of the market,” he says.