The Samurai market entered 2003 with a miserable legacy. The Asian financial crash lingered in Japanese investors’ memories, while foremost in their minds were the Argentine and Turkish crises and the corporate scandals in the US.
“The series of credit events we have seen in recent years has proved to be less easily absorbed in Japan than in other mature markets,” says Stefano Ghersi, head of debt capital markets at Nomura in London.
But while credit risk was worrying investors, paradoxically, yields also sank to new lows, sapping the market further.
The highest coupon in 2003 was for the 20 year tranche of Citigroup’s multi-maturity offer in May, which offered a 1.46% coupon. Citi’s previous 20 year issue only six months earlier had paid 2.24%.
Moreover, the borrowers that usually tap the Samurai market have been pricing at tighter spreads in other markets, as their credit outlook is, on the whole, improving.
“The Samurai market is suffering from the absence of coupon paper,” says Kensey Green, head of fixed income syndicate at Nomura in London. “Spreads on east European and Asian paper have contracted so much in recent years at the same time as interest rates have been dropping. That means the coupons available are not sufficient to tempt retail buyers, although there is some institutional interest.”
Noboyuki Iwamoto, general manager of the international finance department at Daiwa Securities SMBC in Tokyo, agrees. “Retail investors are willing to buy selectively, but the universe of potential Samurai issuers is small at this time,” he says
However, several bright spots emerged in November, when the rise in JGB yields pulled coupons up to more cosmetically attractive levels. That prompted Volkswagen, then Renault and General Motors Acceptance Corp, to venture into the market.
GMAC’s ¥33bn four year bond carried a 1.29% coupon, which translated to 68bp over yen Libor.
Mitsubishi Securities aimed the deal at retail buyers, while the European carmakers went for institutional demand too.
GMAC’s was the first retail targeted deal from a foreign company in recent memory, although there have been plenty of retail Uridashi deals in foreign currencies.
The Volkswagen deal was able to capitalise on the company’s strong rating and international appeal, while Renault was marketed as a quasi-Japanese credit play (it owns Nissan) in the triple-B category.
The GMAC deal offered a large yield pick-up over similarly rated or even lower rated Japanese corporations and opened a new investor niche for the company.
Traditionally, the Samurai market has offered sovereign issuers arbitrage opportunities. A mid-grade credit, for example Brazil in 2001, was able to price at a spread far tighter than that demanded by international investors.
Aligning with global markets
But the Brazil bonds have performed so poorly in the secondary market that Samurai investors are now much more sensitive to spreads in international markets.
The Republic of Croatia experienced this at first hand, on its annual visit to the Samurai market in June. Daiwa and Nomura began marketing the ¥25bn six year issue in the mid-80s over Libor when dollar spreads were in the high 90s to early 100s. The deal was eventually priced at 99bp over.
Another drain on retail interest in Samurais is the rise of the Uridashi (foreign currency bond) market, where investors are being offered a greater diversity of bonds and can spread their assets among different currencies.
But Vince Purton, managing director for debt origination at Daiwa Securities SMBC Europe, says the Samurai market’s diminished importance should not be exaggerated: “It is a temporary phenomenon, driven largely by the sharp contraction in the coupons available on deals.”
Purton argues that investors are not especially averse to any of the credits, but would rather they paid a higher return. “They would rather buy domestic Japanese paper with lower coupons than international names with low coupons. With the recent hike in yields it is likely that strong and competitive investor appetite will later reappear in force,” he says.
Indeed, Mizuho and Nikko Citigroup jointly sold Samurai issues for Household Finance Corp and Tiffany in the second week of September.
“As regards credit product, demand from Japan has improved markedly in recent months and, depending on particular credits and the liquidity on offer, international investors are also prepared to extend down the credit curve,” says Michael Robertson, head of primary debt at Mizuho International.
The year included deals from regular Samurai issuers, and a sprinkling of new names. The Republic of Poland launched its debut Samurai in June through Daiwa.
Korean issuers usually visit the Samurai market, even in quiet years. In May, Daiwa and Credit Suisse First Boston priced Korea East-West Power’s ¥20bn five year issue — its first international bond.
The largest deal of the year was Citigroup’s self-led, five-tranche ¥165bn jumbo in late May. The timing was outstanding — five year JGB yields hit bottom of 0.2% on June 6. Citigroup priced the five year tranche at 0.49%, and by September when yields finally settled, the five year JGB was yielding around 1.04%.