Rediscovering a taste for Japanese credit

  • 10 Dec 2004
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If 2003 was the year when global appetite for Japanese government-linked credits improved, 2004 is the year in which there has been resurgent demand for a much wider range of Japanese credit. Over the following pages, EuroWeek provides an overview of Japanese issuers in the international markets and interviews five leading borrowers active in those markets.

Softbank Corp does not have the most enviable of reputations among Japanese or global investors. But in early March the maverick company raised Eu350m through the issue of seven year bonds yielding 9.375%. That gave a juicy spread of 567bp over the 5.25% January 2011 Bund.

In a sign of things to come, lead manager Deutsche Bank received orders for twice the paper on offer. That was in spite of early scepticism regarding the company's objective in selling a euro transaction. Some feared that Softbank had something to hide in opting for Europe, rather than the US where the regulatory requirements are far more stringent for investment companies.

But the European market was receptive, encouraged by the almost junk bond yield. Despite deep liquidity at home, there is little or no demand for such lowly rated credits, hence Softbank's desire to tap into a new investor base that was receptive to the equity story the company had to tell.

The story told on the roadshow was that although the company would remain cashflow negative for at least another year, Softbank had passed the inflexion point in terms of cash burn and prospects for positive cashflow generation were more promising. 

The market's willingness to listen to Softbank's pitch was partly due to the fact that telecom and media companies are under-represented in the European high yield market. The pricing underscores investors' demand for substantial risk premium, but the success of the deal also suggests they believe Softbank's multi-media strategy appears to be heading in the right direction.

In stark contrast to Softbank, the next noteworthy corporate issuer in the offshore market was Nippon Telegraph & Telephone Corp (NTT), in some multi-media sectors Softbank's most vigorous competitor. The Japanese blue chip also opted for the euro currency market, raising Eu500m in late May through BNP Paribas and Citigroup.

The issue was rated Aa2/AA- and priced at virtually the opposite end of the spread curve spectrum to the extreme pricing Softbank was required to pay. The seven year NTT bonds were priced at 19bp over mid-swaps or 36.4bp over the 5.25% January 2011 Bund.

NTT returns
NTT had been absent from the European capital markets for five years and investors had been keen listeners to the company's story on a non-deal roadshow at the end of 2003, spanning Germany, the Netherlands, Brussels, Switzerland, London and Paris.

The company decided on the late May timing, having released news of a record operating income of ¥1.56tr ($14.2bn) for the year ended March 2004. Unsurprisingly, the issue was snapped up, offering a delightful cocktail of rarity value, high credit ratings, excellent financials and, of course, the Japan effect. Moreover, NTT had won over some detractors of Japan with a much more transparent approach to the market than it had presented when it last tapped the market five years ago.

For pricing relativity, other double-A corporate names referred to by the leads were trading in the range of 10bp-20bp over mid-swaps. Another comparable, albeit at the longer 10 year maturity, was Tokyo Electric Power Co (Tepco), which after a non-deal roadshow in February, priced a Eu1bn issue due 2014 at 30bp over mid-swaps, a deal that had by the time NTT launched tightened to 28bp bid.

In terms of relative value, Tepco's 2009 euro issue was then trading around 20bp over swaps and other issues that investors looked at included the EdF 2013s at around 30bp over swaps and Red Eléctrica 2013s at around mid-30bp over.

Tepco is a notch below NTT both in ratings and in its name appeal to the European investor base. Tepco then carried ratings of Aa3 from Moody's with a stable outlook and a AA- rating from Standard & Poor's with a negative outlook. The agencies' ratings are, bankers say, ?muted? compared with NTT because the former has weathered deregulation in its industry sector, whereas Tepco is facing a long period of liberalisation.

JFM breaks new ground
The euro currency sector has been the firm favourite among Japanese issuers overseas this year. Government agency Japan Finance Corp for Municipal Enterprises (JFM), rated Aaa/AA-, in mid-May raised Eu900m in global format through Merrill Lynch, Morgan Stanley and Nikko Citigroup. The 10 year issue was priced at 7bp over mid-swaps and 20.7bp over the 4.25% January 2014 Bund.

?JFM became the first ever Japanese global issuer of euro denominated bonds,? says Reiko Hayashi, director of debt capital markets at Merrill Lynch Japan. ?It was a prestigious mandate for the largest issuer from the JGGI sector, which had performed extremely well over the previous 12 months, highlighting the improved perception of the Japanese credit, which had recently been upgraded to triple-A by Moody's.?

Last year's JGGI transactions had also performed well in the secondary market, providing an excellent backdrop to JFM's issue in the euro currency market. Says Hayashi: ?The timing of the transaction was on the button.?

When the leads priced the issue at mid-swaps plus 7bp, the last 10 year JGGI benchmark, the Japan Bank of International Cooperation (JBIC) 2013 issue was trading at mid-swaps plus 4bp bid. That led the arrangers to decide that a modest new issue premium to JBIC was appropriate.

?Japan's upgrade from Moody's certainly helped demand from the European investor base and in addition, there continues to be good demand for high quality zero risk weighted assets this year,? says Hayashi. ?There is little opportunity to buy Japan credit away from JGBs and the limited availability of zero risk weighted assets at meaningful positive spreads to Libor certainly helped fill out demand.?

Within days, JBIC had itself returned to the euro currency market, raising Eu750m through BNP Paribas, also at 7bp over mid-swaps.

In June, the Development Bank of Japan (DBJ) then opted for the global yen market, raising ¥75bn through Merrill Lynch and Nikko Citigroup. 

The global issue was the first yen denominated benchmark bond from a government sector issuer in 2004. ?We introduced a 100% pot system to ensure that all the managers would have an incentive to cultivate a full spectrum of investors,? says Hayashi. ?We wanted to do this because the number of active participants in the yen market is still limited, so encouraging more houses to proactively participate should, we believed, help develop the global yen market overall.?

The result was the participation of high quality accounts from Italy and US in addition to the traditional buyers of yen government guaranteed paper such as UK and German fund managers. ?As this became the only 2014 benchmark in the Euroyen/global yen sector, it was a must-own bond for a number of accounts,? explains Hayashi.

?DBJ has a good track record in the global yen market and has a reputation for bringing responsibly priced transactions in what is a sensitive market,? he adds. ?The investor base for new yen issues is international real money managers that are often managing indices. They are high quality, focused investors and they are focused on liquidity and high quality names. They like issues that have liquidity in order to work the index both ways over time.? 

  • 10 Dec 2004

All International Bonds

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 JPMorgan 192,079.22 851 8.17%
2 Citi 181,567.62 744 7.72%
3 Bank of America Merrill Lynch 152,466.12 623 6.48%
4 Barclays 142,653.63 569 6.06%
5 HSBC 120,106.34 625 5.11%

Bookrunners of All Syndicated Loans EMEA

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Credit Agricole CIB 21,924.17 77 8.15%
2 BNP Paribas 19,758.95 84 7.35%
3 Bank of America Merrill Lynch 17,751.88 49 6.60%
4 Deutsche Bank 12,953.29 48 4.82%
5 UniCredit 12,630.44 68 4.70%

Bookrunners of all EMEA ECM Issuance

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Morgan Stanley 6,404.49 28 10.24%
2 JPMorgan 5,949.53 36 9.51%
3 Goldman Sachs 5,596.92 27 8.95%
4 UBS 4,138.47 20 6.62%
5 Citi 4,111.21 29 6.57%