JBIC is one of the six state policy lenders that will be absorbed into the one new government financial policy institution, due to be created in 2008. Mark B Johnson asks Toshiaki Kitajima, deputy director, capital markets division in the treasury department, for his views on recent issuance and trends.
Japan's Council on Economic and Fiscal Policy announced last November that the operations of the Japan Bank for International Cooperation (JBIC) would be split into two.
JBIC's yen denominated loan operation looks set to be absorbed into the Japan International Cooperation Agency (JICA), a provider of technical co-operation for Japanese business activities overseas. Meanwhile JBIC's international financing operation will be incorporated into a newly consolidated public financial institution created in 2008. JBIC as an entity will cease to exist in its own right.
The good news for JBIC management and staff is that it appears as if its international financing operation will retain some organisational independence and even keep its English name.
JBIC's current statutory mandate is to undertake lending and other operations for the promotion of Japanese exports, imports and economic activities overseas; for the stability of international financial order; and for economic and social development as well as economic stability in the developing economies. JBIC has operated under the principle that it will not compete with financial institutions in the private sector.
JBIC and its predecessor, the Export-Import Bank of Japan (Jexim), has issued government guaranteed foreign currency bonds in the international capital markets since 1983. It has a reputation as a leading, high quality borrower.
In September 2005, JBIC even issued its first government guaranteed Thai baht bond to support the Asian Bond Markets Initiative being promoted by the Japanese government in the framework of the ASEAN plus Three (Japan, China and Korea) group.
Funding activities during fiscal 2005 (ended March 31, 2006) included a $750m 5-1/4 year Eurodollar bond issue on June 8, 2005; a five year Bht3bn domestic bond issue in Thailand in August; a 5-1/2 year $1bn global dollar bond issue on November 17, 2005; and a 10 year $650m Eurodollar bond issue on March 9, 2006.
In the FY2006 budget, JBIC has approval to issue the equivalent of ¥240bn of guaranteed bonds. The proceeds of the issues will be used for providing foreign currency denominated (mostly US dollar) loans as part of JBIC's international financial operations.
All debt securities in the international capital markets issued in the past by JBIC and Jexim carry the unconditional and irrevocable guarantee of the Japanese government for principal and interest payments. This puts them on the same credit rating as Japanese government bonds. Government guaranteed bonds have a zero BIS risk weighting.
In the domestic market, JBIC has been issuing bonds without a government guarantee (also called FILP Agency Bonds, or Zaito bonds) since 2001. Zaito bonds have a 10% BIS risk weight for calculating the capital adequacy ratio of depository financial institutions in Japan. Bondholders have a preferential right to be repaid ahead of JBIC's unsecured general obligations which are not represented by bonds.
JBIC, which is rated Aaa/AA-, sold $650m of 10 year bonds on March 9 this year. Based on the coupon of 5.25% and the re-offer price of 99.733 the bond offered a spread of 47.5bp over the 4.5% February 2016 US Treasury. BNP Paribas and Citigroup were joint arrangers.
The bookrunners said at the time that international investors had become increasingly positive about the state of the Japanese economy and consequently the creditworthiness of its international fixed income securities.
The continued resurgence in the economy was confirmed that day (March 9) by the Bank of Japan. It announced that although it would maintain its zero interest rate policy for the moment it would end its strategy of quantitative easing over the following months.
The bookrunners launched the deal with price guidance in the high 40s over Treasuries, which translated to mid-Libor swaps minus 7bp. The deal was launched at plus 47.5bp, or mid-swaps less 7bp and flat to the JFM 2015s and JBIC 2014s.
The bookrunners said investors appreciated this rare opportunity to buy a Japanese government guaranteed asset with a higher coupon than had been seen in the Japanese sovereign and supranational agency sector for some time.
The distribution was in line with expectations with a heavy predominance of Asian buying (over 80%) and central bank participation (77%). Continental Europe took most of the balance with Switzerland leading the buyers.
JBIC will, for the next few two or so years, continue to issue offshore with the guarantee, but it will not be long before its name disappears from the ranks of regular global bond issuers.
|What reform plan?|
EuroWeek asked Toshiaki Kitajima, deputy director, capital markets division in the treasury department at JBIC for his views on JBIC's recent issuance activity.
In terms of international investor perceptions, can you explain the spread relationship in the past 12 months between Libor swaps, JGBs and your peer group? What price or other objectives must you meet to issue overseas?
Our issuances in the international market over the past 12 months are all US dollar denominated bonds. Their spread levels versus Libor differ according to their duration, however, around minus mid-single digit to mid-teens.
Although the market has been volatile, Japanese government guaranteed institutions are enjoying the healthy economic situation in Japan. When we issue overseas, we take into consideration not only the funding cost level but also the duration and timing requirement from our ALM and market conditions. We also consider it important to broaden our investor base.
Are you likely to issue overseas in yen?
Proceeds from international bond issuance will be used for our international financial operations mostly in the form of US dollar denominated loans. The selection of currency for bond issuance depends mainly on market conditions and we have issued yen denominated Eurobonds in the past.
Can you explain the spreads and spread trends in the past 12 months for Zaito issuance versus JGBs and top flight domestic corporate issues such as NTT or power utilities?
Since the change of monetary policy by the Bank of Japan this March, interest rates have risen and the domestic market has become volatile. Mainly as a result of such volatility and the interest rate hike, credit spreads over JGBs for corporate bonds and Zaito bonds have widened.
Spreads for high grade issuers including agencies and power utilities have widened from the single digits to around 20bp. We understand that such a widening is not because of an increase of credit risk of the issuers but mainly due to the market situation including demand-supply dynamics.
For this fiscal year, we have already issued five year and 10 year bonds, each of ¥50bn. We have regularly issued these maturities of bonds. In addition, we are also active in longer maturities up to 15 and 20 years.
Are the government's reforms for the policy institutions affecting international investor sentiment and your spreads?
If we discuss this matter based on the spread level for our bonds, we would say there is no notable effect of the reform plan.
The bill "Advancing administrative reform to realise a streamlined and efficient government" which the Diet passed this May says that "the interests of the clients who have received loans and utilised services from the present policy-based financing institutions and the holders of securities issued by them shall not be unjustifiably infringed." Such a comment might have allayed some of the concerns of the investors.
In the spirit of the wording above, JBIC will take adequate account of the interests of its clients including the governments of developing countries and the holders of JBIC-issued securities.
How about domestic investor sentiment?
Basically, the situation is the same as international bonds. However, there is a major difference as our domestic bonds are without a government guarantee and therefore investors in such bonds might be more eager to learn about our future form.
To remove possible concerns over our future and current uncertainties, we will continuously promote investor relations activities and the disclosure of information both for domestic and international investors.