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Week of marvels for yen bonds as Citi sells ¥400bn

14 Jun 2007

A remarkable flowering of yen bonds this week dazzled high grade bond specialists, and was even enough to take their minds off the extreme volatility in the US Treasury market that derailed dollar bond issuance at the end of last week and kept battering investors and issuers all week.

Conditions in yen this week echoed those in the dollar market until last Thursday (June 7) — as government bonds sold off, investors rushed into the market to snap up bonds offering juicy high coupons. That gave swapping issuers highly attractive floating rate funding.

Citigroup issued the largest ever Samurai bond, for ¥270bn, yesterday (Thursday), and will follow that today (Friday) with a ¥140bn global bond. The combined ¥410bn ($3.34bn) fundraising will be Citigroup’s largest ever in any currency and the biggest foreign financing in yen.

That deal was driven mainly by Citigroup’s need to refinance its $7.7bn acquisition of 61% of Nikko Cordial in April — the US bank will keep the money in yen.

It must have been galling for funding officials at KfW Bankengruppe and Development Bank of Japan to have Citigroup steal the limelight in a week when they both launched yen issues that were ground-breaking in very different ways.

The German development bank issued a ¥50bn 30 year global bond, the first plain vanilla JGB-surrogate issue to extend beyond 20 years. The deal was made possible by a sell-off in JGBs, which widened swap spreads and generated attractive funding arbitrage for KfW.

And DBJ opened a new era with the first international issue from one of the Japanese state financial institutions without the government’s guarantee.

DBJ and sister agencies such as Japan Bank for International Cooperation will gradually begin to fund themselves on a standalone basis, and some may ultimately be privatised. The agencies already issue unguaranteed zaito bonds domestically but all their international paper has been guaranteed.

Merrill Lynch priced the five year Euroyen issue at 9bp over JGBs, when DBJ’s guaranteed June 2012 deal was bid at around JGBs plus 0.5bp.

The deal was two thirds subscribed — a good result for the Euroyen market — but yen bond specialists sniffed at the pricing. "The issue was priced at 9bp over, which is consistent with where DBJ would issue in the domestic market on a zaito basis but I don’t know whether an unguaranteed bond for a bank that is going to be privatised in the next couple of years makes sense for foreign investors," said one head of debt syndicate. "If you look at where you might price a double-A bank in five years, it would be more like 15bp or 16bp over the JGB."

However, there is very strong support for the bond, in that the bondholder has a preferential right to be paid before other unsecured creditors, including government financings, which are equal to about 75% of DBJ’s total assets.

"The background is the intention of the Japanese government to reform its agencies and DBJ will be privatised in time," said Alan Schmoll, associate on Merrill Lynch’s Asia Pacific Rim debt syndicate desk in Tokyo. "The government has said the privatisation will not be complete until at least 2013.

"The idea of this transaction is to diversify the funding sources, beginning the process of having DBJ fund on a standalone basis, because there will come a point where the Japanese government will no longer guarantee these new issues. They have already issued domestic agency bonds without a guarantee since 2000."

Citigroup salvo hits target

Whereas Euroyen and global deals are always slow to clear the market, Samurai issuers can hope to sell out quickly, and Citigroup’s battery of bonds achieved that (see cartoon, facing page).

The yen market has not seen issues of this magnitude since 1995, when the Republic of Italy issued ¥550bn in a three tranche global deal.

Citigroup’s ¥270bn Samurai package encompassed tranches of three, five, seven and 10 years, in fixed and floating rate format. It surpasses Citi’s own record for the largest Samurai, a ¥230bn deal in 2005.

A byproduct was to push sole lead Nikko Citigroup into the stratosphere of the yen bond league tables. In Dealogic’s table for all international yen issuance, Nikko Citi has led ¥790bn of issues in 2007, its closest rival being Mitsubishi UFJ Securities with ¥366bn. The gap will widen when Citigroup launches its ¥140bn global bond.

US issuers were prohibited from issuing Samurais for much of last year, pending the resolution of withholding tax issues that arose in relation to the introduction of the new Japanese Book Entry Transfer System.

That created fears that the US tax authorities would cease to define Samurais issued by US firms as bearer bonds, making them subject to US withholding tax.

The situation was resolved this year but Citigroup has been absent from the Samurai market for a year and a half, creating pent-up demand for its name. As a result, the issue was well oversubscribed.

An official at one of the co-leads said he sold his small allocation in the various tranches without difficulty. "The spreads Citigroup can offer in a yield-hungry environment are something investors have looked at very keenly," he said. "It was not the most perfect market backdrop and it is a massive deal to get away. They had to have a degree of comfort before proceeding. They have been out of the market for a long time and at the kind of levels they are paying I am sure it will have gone very well."

Yields varied from 6bp over Libor on the three year fixed rate tranche to 20bp over on the 10 year fixed.

According to Dealogic, the Citigroup deal takes this year’s Samurai issuance to ¥888bn ($7.6bn), the highest issuance ever by this point in the year, and already surpassing the total output in 2006 of ¥780bn.

JP Morgan Chase and Lehman Brothers brought deals in May and Bank of America is planning a multi-tranche bond comprising five year fixed, five year floating and 10 year fixed segments. Lead managers are Mizuho and Nomura.

As US issuers are not permitted by the US Internal Revenue Service to issue Samurais beyond 10 years, Citigroup’s longer dated needs had to be filled in the global arena. The longer dates also fit well with investor demand for duration.

"In the recent sell-off, the 30 year JGB rate had fallen by 15bp and super-longs by 25bp, demonstrating the strong demand in the longer end of the market," said the head of primary markets at one bank in Tokyo. "However, given all the spread compression, there has been no supply. You have 30 year JGBs and KfW has issued a 30 year this week but investors wishing to match the index have had to buy JGB surrogates. Life insurers, pension funds and money managers who have been looking for spread product have had nothing to buy until now."

Citigroup’s global bond comprises a ¥50bn 20 year tranche, a ¥50bn 30 year and a ¥40bn 40 year. Price talk is 24bp over Libor, 30bp over and 32bp over.

The 40 year tranche is the first ever corporate deal at this maturity in yen.

KfW extends SSA curve

KfW also ventured into new territory with its ¥50bn 30 year global, though its transaction was very different from Citigroup’s, being motivated by swap arbitrage.

There are 30 year JGBs, but they are illiquid compared with the 20 years and it is a hard maturity at which to hedge a new deal.

Hence issuance at this tenor has been slight, apart from many small private transactions, securitisations and structured notes. Some of the more adventurous banks have done 30 year benchmark deals, but no triple-A rated JGB surrogates.

Bernd Siegfried, co-head of funding at KfW in Frankfurt, said the fact that around 11.5% of the JGB global index extends beyond 15 years and that the JGB makes up 27% of the world global bond index confirms that longer maturities play an important role.

"To mirror that for global issuers, there has been nothing available until now beyond 20 years," he said. "The longest maturity KfW has is 2026, so there was a lack of paper from a global perspective, and from the demand side, that was an opportunity that we could potentially fill in."

KfW paid 9bp over JGBs, earning it funding at around 10bp or 11bp below yen Libor, while the coupon of 2.6% proved appealing to investors.

Sole lead manager Nikko Citigroup told EuroWeek the issue was about half sold by pricing. "This is a great result in a week of huge volatility," said Ebba Samuelson, head of frequent borrower syndicate at Citigroup in London. "To go out to 30 years is a big duration decision for a lot of investors — so it is not surprising we were not fully subscribed."

CAF in the slipstream

Other Samurai issuance this week included a two tranche bond from Corporación Andina de Fomento, the Andean development bank, led by Daiwa Securities SMBC and Nomura.

The ¥20bn three year fixed rate tranche was priced at 22bp over Libor and the ¥10bn seven year at 37bp over.

In the pipeline, US insurer Aflac has mandated Mizuho and Nikko Citigroup to lead a benchmark five year fixed rate Samurai issue.

Kaupthing has named Daiwa SMBC and Nomura as leads for a ¥20bn-plus three tranche Samurai comprising three year fixed, five year fixed and five year floaters.

The issue should be priced towards the end of June after roadshows, which begin next week.

A ¥35bn five year Samurai for the Export Import Bank of Korea will be priced on Tuesday next week at around 17bp-18bp over Libor. Daiwa is sole lead.

PTT, Thailand’s largest oil and gas company, will also launch a Samurai next week — the ¥30bn 10 year will be led by Daiwa, HSBC and JP Morgan after investor presentations in Tokyo, Hong Kong and Singapore.

In Euroyen, Bayer Holding Japan, guaranteed by the German drug company, will issue its first yen bond next week, lead managed by Daiwa, Mitsubishi UFJ and Mizuho. Unofficial price talk for the ¥30bn-plus five year bond is 25bp-29bp over JGBs.

Jo Richards

14 Jun 2007