Although volumes in the Samurai market are stable and healthy, the market remains concentrated among a relatively narrow range of issuer types. Philip Moore looks at the prospects for increased diversification in the market.
One of the most striking statistics tracking the evolution of the Samurai market in 2011 is that in terms of issuance by country, the Netherlands ranked third equal alongside the US (each accounting for 11% of total new issuance volume). A meaningful Dutch presence in the market need not be a surprise, given that 2009 saw a BNG issue and an inaugural transaction from FMO, which returned to the market the following year.
In 2011, however, the entire Dutch issuance in the Samurai market was accounted for by a single borrower, in the form of Rabobank, which came to the market three times in the year, raising just over ¥240bn across a variety of maturities ranging from three to 10 years.
Vince Purton, head of debt capital markets at Daiwa in London, says that the three Samurais printed by Rabobank in 2011 need to be put in perspective. "In the 1990s we saw some European sovereigns issue several times a year, so there is a precedent in place for regular repeat issuance," he says. "In recent years we have seen several names issue twice a year but 2011 presented a unique opportunity to Rabobank. Faced with the temporary closure of the market to all but the best known and best rated of the European credits, Rabobank was in a very strong position to take a bigger slice of the cake and it took full advantage of the opportunity."
Before the upheavals of the fourth quarter of 2011, however, Rabobanks popularity with Japanese investors was easy enough to understand. Although it surrendered its cherished triple-A rating from Standard & Poors (S&P) at the end of November, the Dutch co-operative bank remains the worlds best-rated privately owned bank according to S&Ps new methodology.
Yutaka Ban, senior credit analyst in the financial market research division at SMBC Nikko Securities in Tokyo, says that the strength of Rabobanks franchise and ownership structure, twinned with its low exposure to the troubled peripheral economies of Europe, make the bank one of the most sought-after credits in Japan.
That has allowed Rabo to be a regular borrower in the Samurai market for several years. Nevertheless, the fact that a single borrower could account for 11% of issuance in 2011 speaks volumes about the need for more diversification in the Samurai market. "The market is dominated by financials, and the main challenge in the future will be to identify a broader range of issuers," says Ushio Miyagi, director of debt syndicate at SMBC Nikko Securities in Tokyo.
As Miyagi points out, one borrower group that has been conspicuous by its absence from the Samurai market for many years in non-guaranteed format is the government sector. That is in marked contrast to the first three decades of the markets existence, when developed as well as emerging market sovereign borrowers made active use of the Samurai sector. Australia was the first sovereign issuer, in 1972, while Mexico and Brazil both debuted in the market the following year, according to a historical review published by the BIS.
Among European sovereigns, according to the same review, Greece came to the market for the first time in 1998, while in the market for structured Samurai issuance, Denmark issued the first reverse dual-currency Samurai bond the following year.
In recent years, unguaranteed sovereign issuance has been thin on the ground, either because the economics have failed to stack up for borrowers, or because the credits have been regarded as too weak and volatile for investors.
In 2011, the only sovereign borrower to have accessed the Samurai market on an unguaranteed basis was the Republic of Poland, which has been a regular issuer in the yen market since 2003, when it launched a debut ¥25bn seven year transaction. Its return to the market last year was a ¥25bn four year retail-targeted issue in July sole led by Daiwa at 71bp over yen swaps, placed with 8,358 investors throughout Japan.
Daiwas Purton says that Polands choice of a retail-targeted transaction was chiefly a by-product of the deteriorating economic situation in Europe. "Poland was an innocent victim of the European sovereign debt crisis," he says. "Although its ratings were stable, because of concerns about potential contagion, many institutions were instructed by their boards not to buy European sovereigns."
Poland was advised, however, that demand from retail investors was likely to be strong for a number of reasons, says Purton. First, the coupon of 1.25% was appealing to investors starved of yield, allowing the lead to focus on demand among holders of maturing retail-targeted JGBs. Second, the Polish credit was already familiar to and popular with Japanese investors. Third, sovereigns were regular issuers of retail Samurais in the past.
JBIC scheme brings joy
One area of the sovereign sector that has been a vibrant source of new issue activity, however, is the market for Samurai bonds guaranteed by Japan Bank for International Co-operation (JBIC) under the Market Access Support Facility (MASF). Launched in May 2009, MASFs original objective was to "encourage efforts to regain access to international markets by Asian developing countries that have regularly raised funds through sovereign bond issuance in international markets but are temporarily unable to do so due to the current financial turmoil."
JBIC announced at the time that the facility would provide guarantees totalling "up to ¥500bn for Samurai bonds issued in the Japanese bond market by Asian developing countries". The first issue under this scheme was a ¥35bn 10 year transaction for the Republic of Indonesia in July 2009, priced at 135bp over yen Libor and led by Daiwa, Mitsubishi UFJ, Nomura and SMBC.
In April 2010, the guarantee scheme was extended under the "Guarantee and Acquisition toward Tokyo Market Enhancement" (GATE) initiative, allowing JBIC to acquire as well as partially guarantee Samurai bonds.
Between the summer of 2009 and March 2011, when issuance under the MASF scheme was temporarily halted following the Tohoku earthquake, the market for JBIC guaranteed bonds expanded and developed in a number of ways. One of these was the extension of the initiative to cover Latin American borrowers. Colombia became the first sovereign from the region to make use of the facility, launching a ¥45bn 10 year transaction in November 2009, since when Panama, Mexico and Uruguay have also issued under the MASF.
Increased geographical diversification of the market for JBIC guaranteed Samurai bonds has dovetailed with larger deal sizes, longer maturities and tighter pricing. All three were in evidence in March 2011, when Turkey launched its first Samurai since 2000 and the first transaction under the GATE scheme from a borrower from the Europe, Middle East and North Africa (MENA) region. Priced at 48bp over swaps and led by Daiwa, Mitsubishi UFJ Morgan Stanley and Mizuho Securities, Turkeys ¥180bn 10 year deal was the largest Samurai since August 2011, when Brazil priced a landmark ¥200bn retail-targeted transaction. "Turkeys issue was noteworthy not just for being the largest Samurai of the year, but also because it was the largest bond issue Turkey has ever issued in any currency," says Purton at Daiwa.
"We are particularly proud to have re-opened the traditional sovereign retail Samurai sector with the first such deal since South Africa in 2001," Purton adds. "We saw many such deals in the 1990s from a variety of sovereign names, some of them issuing several times a year. In 1995, for example, National Bank of Hungary alone issued seven times in this format."
Turkeys Samurai was priced hours before the catastrophic events of March 2011 brought issuance under the MASF scheme to a halt. By early 2012, however, with Japans economic recovery gathering momentum, the initiative was being revived, with Turkey awarding the mandate on its second transaction in February.
Bankers are hopeful that there may be a rise in sovereign issuance in the Samurai market, with a number of potential sources of supply beyond the JBIC guaranteed sector. Frank Toulouze, managing director of debt capital markets at SMBC Nikko Capital Markets in London, says that one of these is sovereign borrowers in the AA/A ratings bracket expected to begin non-deal roadshowing to Japan this year with a view to accessing the Samurai market for the first time.
A second potential source of sovereign supply in the Samurai market is government borrowers that have previously accessed the Japanese investor community on a guaranteed basis that may now be strong enough to come to the market without a guarantee. Turkey is an example of a borrower that may emerge as a candidate for unguaranteed access to the Samurai market in years to come. A more immediate candidate, which has already indicated that it has ambitions to tap the Samurai market on a standalone basis, is Mexico.
The domination of the Samurai market by financial institutions has also tended to dictate that the credit quality of borrowers in the market have been broadly similar, which is a reflection of the relatively conservative investment strategies of Japanese institutions. In recent years, however, there has been a broadening of the credit profile of borrowers in the Samurai market, which has started to provide investors with a smattering of higher yielding opportunities. In the financial services sector, a number of Korean banks in particular have offered an appealing price pick-up, often at the shorter dated end of the new issue market.
In 2011, the A1/A- Woori Bank was the first Korean bank borrower to test Japanese investor demand for lesser rated banks, issuing a ¥50bn three-tranche bond which was the largest from a Korean borrower in the Samurai market since late 2007. Led by Barclays Capital, Mitsubishi UFJ Morgan Stanley, Nomura and UBS, this was increased from the ¥15bn for which the borrower originally filed, throwing some light on the strength of demand for weaker bank credits among yield-starved Japanese institutional investors.
While Rabobank had printed the three year ¥12.1bn tranche of a ¥74.3bn five-handled deal at just 16bp over swaps the previous week, Woori tempted investors with juicy triple-digit pricing on all three of its tranches. The one year ¥20.9bn tranche was priced at 115bp over swaps, with the small ¥2.6bn 18 month paper offering a 125bp spread and the ¥26.5bn two year tranche priced at 135bp over.
With their appetite for yield whetted by the Woori transaction, investors were invited to step further down the credit curve early the following month when Busan Bank, rated A2 by Moodys, became the first regional Korean bank to access the Samurai market. Long in the making, and not helped in its marketing process by sabre-rattling on the Korean peninsula, the Busan Bank Samurai was led by Daiwa, JP Morgan, Mizuho Securities and UBS. Busan raised ¥20bn through a ¥16.5bn tranche priced at 133bp over swaps and a ¥3.5bn portion at a 140bp spread.
An attractive pick-up was also offered later in the year by the A1/A rated Korea Development Bank (KDB), which raised ¥53.7bn in the Samurai market against the backdrop of a much more fragile global capital market in early October. The lions share of this transaction, led by Barclays Capital, Mitsubishi UFJ Morgan Stanley, Mizuho and SMBC Nikko, was a ¥47bn one year tranche priced at 90bp over swaps. The two, three and five year tranches, meanwhile, raised ¥3.7bn, ¥600m and ¥2.4bn respectively at spreads to swaps of 105bp, 115bp and 140bp.