DBJ - Development Bank of Japan

  • 01 Nov 2002
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The Development Bank of Japan sold a global Euroyen issue earlier this year in the aftermath of the credit rating downgrades for Japan. Kazuhiro Takahashi, director of the Office of Financing and Planning, explains why he was satisfied with the issue and why he thinks international investors are obtaining good value from Japanese government guaranteed issuers in the current environment.

Can you explain the timing for your ¥75bn global bond issue in June?

There was no specific target date for the issue. The market conditions were appropriate at the time. We saw that demand for yen assets had been growing among many global fund managers who were underweight the currency mainly due to a lack of supply. As the timing was just after the downgrade of Japan's domestic rating by Moody's, we also believe that the success of our deal demonstrated the re-establishment of Japanese credits among international investors.

How did the 6bp spread compare to the price you could have achieved in the domestic public bond market for 10 year paper in Japan?

We suppose that we might have been able to achieve a tighter re-offer spread in the domestic bond market with the government guarantee. However, on an all-in cost basis, we succeeded in raising funds at cheaper cost levels in international markets due to differences in fees between domestic and international placements.

Why did you select the 10 year maturity?

From the viewpoint of our asset and liability management, 10 year and longer dated issues are preferable. In addition, supply in the 10 year sector had been scarce and demand from investors, especially those managing index funds, was strong.

Why such a long wait since your last overseas deal?

Our annual budget for international bonds is fixed at the beginning of each fiscal year. When we issued Eu750m in the Euromarket in July 2001, we still had about ¥100bn left to borrow for the FY2001 budget. However, because demand for our loans was not as strong as we had originally expected, we could finance our asset side without needing to tap the international bond markets again.

As for currency, we have no specific preference for yen, euros and dollars. We always try to tap the best market in terms of funding cost level and overall market conditions. In fact, we tapped dollars in 1999 and euros in 2001.

What impact did the ratings' downgrades earlier in the year have on the distribution and pricing of the new issue?

We did not see any specific impact on the new issue. However, in terms of international investors' views on Japanese credit, we believe that the downgrade by Moody's encouraged fund managers to increase their yen positions because the downgrade had made the credit status of Japan more stable. We might not have achieved more than 20% distribution of the issue into the US if we had launched the issue before the downgrade.

Did DBJ impose any particular stipulations on the two lead managers that the bonds should not be placed in Japan, especially given that this is almost a JGB surrogate?

We did not impose any stipulations on lead managers. However, we believe that both managers fully understand that one of the most important reasons we raise funds in international markets is to broaden our investor base outside Japan.

Do you believe that the issue represented value for investors, compared with formerly comparable credits such as KfW or OKB trading at up to 25bp below JGBs at that time?

We believe that the issue did represent value for some investors because there are not that many high grade issuers with positive spreads over JGBs in the market. We saw some switching, yet we are not sure whether any were out of triple-A US or European agencies.

How does DBJ trade in the euro or dollar markets against comparable sovereign guaranteed G7 credits?

We regret to say that Japanese government guaranteed issuers, including ourselves, continue to price and trade at levels we consider cheap compared with comparable sovereign guaranteed G7 credits.

Japan's economic potential, as well as the shortage of sovereign papers among OECD countries, will, we believe, encourage investors to re-assess where DBJ should be among comparables.

Were you surprised in any way at the geographical spread or the amount of switching from other 10 year yen bonds and from JGBs?

Regarding the distribution, we think investors were geographically well diversified and we are quite satisfied with that. We were a bit surprised by the fact that US investors took up over 20% because we understood that they took up a much smaller portion of the JFM global yen deal earlier this year.

We heard from the lead managers that a considerable portion of the orders were made up of new money. This is what we expected regarding the demand from fund managers who had under-invested in yen.

What are your funding requirements for the fiscal year 2002/2003?

According to our investment and loan programme for FY 2002/2003, we plan to fund a total of ¥1,200bn. The breakdown of this plan is ¥677bn borrowing from the government, ¥183bn government guaranteed international bonds, ¥50bn government guaranteed domestic bonds, ¥200bn non-guaranteed domestic bonds, and some other financing.

As for bond issuance in the international market, we have already issued ¥75bn, and we will issue depending on our needs for funds within the rest of the budget.

How does the cost of funding from domestic banks or other lenders (for example insurance companies) compare with the public bond market in Japan?

Currently, companies without high credit ratings have difficulty funding from the domestic public bond market. For most of those companies, borrowing from banks and other lenders is the only way to raise funds.

Therefore, generally speaking, only highly rated bonds can be issued in the public bond market in Japan. For highly rated companies, the relative funding cost of issuing bonds to borrowing from banks varies from case to case.

You are now permitted to issue in the domestic bond market both with and without the government guarantee. Can you explain how successful this combination is?

Since August 2000, we have issued government guaranteed bonds in the domestic market and this year we plan to issue ¥50bn. Also, as for FY2002 budget, we requested ¥100bn for the domestic guaranteed bonds.

Besides this, we started to issue non-guaranteed bonds (FILP agency bonds). We issued ¥100bn last fiscal year, and plan to issue ¥200bn this fiscal year. Moody's and Standard & Poor's gave the same ratings to our FILP agency bonds as for the sovereign bonds. *

  • 01 Nov 2002

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1 JPMorgan 132,387.73 545 8.30%
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4 Barclays 99,545.40 383 6.24%
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Rank Lead Manager Amount $m No of issues Share %
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1 Bank of America Merrill Lynch 11,525.35 30 7.25%
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5 Commerzbank Group 7,837.68 40 4.93%

Bookrunners of all EMEA ECM Issuance

Rank Lead Manager Amount $m No of issues Share %
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1 Morgan Stanley 4,425.28 19 11.23%
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4 JPMorgan 2,809.08 19 7.13%
5 UBS 2,241.39 12 5.69%