While the offshore yen and domestic Samurai bond markets have continued to wilt, the Uridashi market blossomed in 2003 as triple-A supranationals and agencies took advantage of the huge Japanese retail investor base looking for higher returns than are available in their own currency.
Uridashi product has become a big part of the non-core dollar market — as much as 50% of Australian dollar issuance and 25% of Canadian dollars by some accounts.
Although it is impossible to register exactly how much supply there is in this essentially private market where neither banks nor borrowers are keen to publicise their activity, some estimates put the total as high as $25bn equivalent.
The market has consisted mainly of issuance in US and Australian dollars and euros, but in 2003 Canadian and New Zealand dollars were introduced to cater to the Japanese appetite for higher returns.
But the most popular currency remained Aussie dollars, prompting KfW to make its first foray into the market with a A$1.665bn deal in March.
The Nomura-led three year issue pays 4.2% — a vast improvement on the 0.07% retail investors could earn at the time on their bank deposits.
The market is dominated by the highest quality, triple-A issuers as Uridashi buyers do not want credit risk as well as currency risk.
“Supranational issuers are pricing very aggressively sub-Libor,” said Andrew Asbury, head of debt capital markets at Daiwa SMBC Europe. “They are obtaining rates as much as 15bp below the levels at which they might price in the dollar global market, for example.”
Just how important the sector is to these issuers is confirmed by Håkan Lonaeus, chief of the capital markets division at the Inter-American Development Bank in Washington. He says retail targeted transactions comprised 60% of the IADB’s funding programme in 2003, compared to 30% in 2002.
“The Uridashi market has provided the IADB with unparalleled access to Japanese retail investors,” he says. “Given the low interest rate environment in Japan relative to other global markets, the Japanese retail investor will continue to search for higher yielding, high quality opportunities.”
A further growth area in the sector is deep discount bonds. Kensey Green, head of fixed income syndicate at Nomura in London, says there have been some sizeable trades of $250m or more since the product was introduced about 18 months ago.
The paper is issued by top tier credits and distributed to high net worth investors in Japan. The deals usually have 10 year tenors. Green says: “The combination of the deep discount and low coupon provides tax efficient returns for the investors at the same time as achieving deep sub-Libor funding for the issuers.”