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Yen: Samurais take the lead

13 Jan 2006

Japan's economic recovery has boosted the domestic yen bond market and pushed the Nikkei to a five year high. However, the international yen bond market is shrinking and only the Samurai market shows signs of growth. Jo Richards reports.

The Samurai bond market continued in 2005 to build on the progress it had made in 2004, when issuance almost doubled from ¥700bn to ¥1.4tr. In 2005, sales rose only slightly to ¥1.7tr ($15bn) but the extension of maturities beyond 10 years and deals from a broader array of issuers showed the sustainability of the market over a two year period.

Practitioners believe the expansion will continue, albeit slowly, as issuers and investors gain confidence and the Japanese authorities take small steps to deregulate the market.

"As investors' exposure to international credits has steadily increased and as they have become more confident in the secondary performance of bonds in the Samurai market, they have looked to diversify their portfolios and push the envelope as far as maturities are concerned," says Richard Tarn, executive director at Mizuho International in London. "These factors contributed to the broadening of the issuer base last year, and also to the success of the 15 year tranches that have been issued during the past three months."

The reason for the Samurai's growth is essentially the same as in 2004 — low interest rates, tight domestic spreads and redemptions outweighing issuance in the domestic bond market. The yen/dollar basis swap also remained conducive for most of the year.

The Samurai market is trying to make itself more issuer friendly by making small changes in regulations. A book entry system, for example, will be introduced early in 2006 and phased in gradually before 2008. In addition, Japanese securities laws were amended in June, making annual and semi-annual reporting in English possible for the first time. For Samurais, this will be effective some time before March 2009 after English disclosure is tested for foreign mutual funds from December 2005.

Citigroup pioneers long end

US financial institutions accounted for almost half the Samurais issued in 2005, with names such as Citigroup (¥230bn), Bank of America (¥115bn), Goldman Sachs (¥135bn), Bear Stearns (¥76bn) and HSBC Finance (¥90bn) contributing over ¥800bn ($6.9bn) to the year's supply.

The Citigroup multi-tranche financing, launched in September, was notable from several angles. At ¥230bn, it was the largest Samurai issue of the year and the third largest debt issue ever in the domestic bond market. It also included the first 30 year Samurai tranche. The transaction, led by Nikko Citigroup, comprised a ¥75bn five year tranche, a ¥40bn seven year, a ¥40bn 10 year, a ¥45bn 15 year, a ¥20bn 20 year and a ¥10bn 30 year.

"Investor response was very positive to Citigroup's credit, as well as the performance of its previous Samurai issues," says Marc Falconer, syndicate head at Nikko Citigroup in Tokyo.

"Also, since the company's last issuance in 2003, there has been in the order of ¥200bn of redemptions of Citigroup yen bonds. As a result, investors had line availability to buy the name and were looking for supply. Against this background, we were able to increase the deal from ¥140bn to ¥230bn."

Lone triple-A

General Electric Capital Corp provided investors with the only triple-A rated Samurai paper to be issued in 2005.

Its first transaction, an ¥85bn three tranche bond, launched in May by Mitsubishi Securities, Mizuho Securities and Nomura, re-opened the market after the Ford and General Motors downgrades.

At the time of GECC's launch, Ford and GM's secondary Samurai paper had widened sharply and investors' warm response to the GECC transaction not only reflected a flight to quality but also attested to the resilience of the Samurai market.

Paul Morganti, head of debt capital markets at Mitsubishi UFJ Securities in London, describes GECC as the perfect name to have re-opened the Samurai market after its bout of volatility.

"The GECC issue was the first test of the market since the troubles with GM and Ford began and was really a litmus test to see how investors would react," he says.

"The response was positive, which is partly attributable to the company's triple-A status, and there was certainly a flight to quality aspect to the trade.

"The transaction is symbolic of the maturity of investors' credit perspective and their ability to distinguish individual companies and sectors rather than develop an aversion to all foreign credits, which is something we have seen in the past."

GECC's second transaction — ¥100bn in five, 10 and 15 year tranches — was launched in November by Mitsubishi UFJ, Mizuho and Nomura.

Ford stars with jumbo

Ford Motor Credit Corp (FMCC) may no longer be the investment vehicle of choice but in February 2005, it issued the largest single-tranche Samurai ever launched. The ¥160bn three year issue, led by Daiwa, Mitsubishi and Mizuho, was increased from ¥30bn and priced at swaps plus 135bp, well inside price guidance of plus 140bp-160bp.

The deal attracted a landslide of demand from institutional investors eager for the yield on offer. The car company's subsequent fall from grace had a muted effect on the Samurai market. "During the GM and Ford ratings crisis earlier this year, the Samurai market absorbed some difficult credit news but held its nerve through a volatile trading period for spreads," says Morganti. "There was no evidence of the panic selling associated with previous credit shocks such as the Xerox and European telecom credit crises some years back, when the market seized up completely."

Sovereign fare

Poland and Hungary were the only sovereign issuers of 2005, and Poland established two records for central European borrowers.

Its ¥75bn seven year bond, launched in June by Daiwa and Nomura, was the largest Samurai issue from the region and its ¥50bn 15 year led by Daiwa and Mizuho was the longest Samurai issue from central Europe for a decade. At ¥50bn, it was the biggest issue in the 15 year maturity by any borrower since a ¥50bn deal for the World Bank in 1985.

The Republic of Hungary sold a two tranche Samurai in June, raising ¥30bn of five year paper and ¥45bn over seven years, led by Daiwa and Mizuho.

LatAm/HK revivals

Deals from Latin America and Hong Kong were a feature of the year — no Latin deals had been issued since the Argentine default in 2001 and the last Hong Kong issuer was seen in 1997.

The Latin offering came from Corporación Andina de Fomento (CAF), the Caracas-based supranational development bank, which issued ¥20bn of three and seven year bonds through lead managers Mizuho and Nomura.

And the first Hong Kong corporate deal since the region's integration with mainland China came from property company Cheung Kong Finance, which issued a ¥33bn five year deal led by Goldman Sachs and Mizuho.

"The fact that the Samurai market could absorb a name like Cheung Kong at competitive levels shows that the key investors have gained in confidence, and are prepared to broaden their parameters — provided transactions are appropriately roadshowed, and the leads are known to provide adequate secondary market transparency," says Mizuho's Tarn. 

EIB shines in neglected offshore yen market
 Limited arbitrage opportunities for international issuers and the availability of more competitive funding costs in other currencies curbed international yen bond issuance in 2005, as the market once again took a back seat to the more receptive Samurai market.

With Japanese government bonds (JGBs) trading close to Libor, high grade credits would trade flat to or through JGBs. Given that choice, European investors with yen portfolios prefer the liquidity of the JGB market. Withholding tax is no longer an issue with most fund managers, as most of them have been granted tax-exempt (clean Furikae) status.

"The international yen market has been challenging in 2005," says Steve Apted, head of debt syndicate at Daiwa SMBC Europe in London. "We have seen only a handful of major transactions and, while most of them have fared reasonably well, very few were fully subscribed.

"Interest rates have been under pressure since the second half of the year. People expect rates to rise and the end of the zero interest rate policy has taken the edge off international demand for yen."

The highlight of the year for offshore yen was undoubtedly the ¥100bn 12 year global transaction offered by the European Investment Bank in June. Lead managers were Nikko Citigroup, Nomura and UBS.

Not only was this the first supranational issue in the global yen market since 1997, it was also the EIB's first public yen issue since 1999. In addition, as there was no new 10 year JGB supply, the EIB bond provided the market with a useful benchmark.

Eila Kreivi, EIB's head of funding for America and Asia Pacific, says that, while the yen market remains strategically important to the EIB, the institution had not had an opportunity to issue until June.

"There was a sell-off in the JGB market in June on the back of more encouraging signs of domestic growth, which resulted in investors starting to re-weight their portfolios," she says. "As a consequence, the underlying reference JGB 270 was around 5bp higher than the previous month. At the same time swap levels reached a more favourable level and that coincided with investor demand driven by the portfolio realignments."

Kreivi says the after-swap cost of the transaction was around the average of the EIB's dollar and euro levels. However, according to market participants, the borrower would have paid a premium of around 10bp over funding alternatives at the time.

Covered bond issuers were among the few candidates to provide investors with triple-A assets yielding spreads over JGBs.

Dexia Municipal Agency, for example, issued ¥60bn of obligations foncières through Nomura and UBS in May. The seven year bond offered 3bp over the JGB curve and, to the surprise of many yen specialists who had thought the deal too tight, it sold well to cash buyers in Europe and Asia, allowing the deal to be increased from ¥50bn. 

13 Jan 2006