Japan Highway Public Corporation needs ¥5tr ($50bn) in new funding each year to keep upgrading and extending the already immaculate Japanese road system. There is the likelihood that Japan Highway will be a far more regular name in the international markets as its main funding source in Japan, the post office savings funds, is likely to be cut back as depositors switch to higher yield investment.
The prestigious government guaranteed name had been absent from the European markets until the issuer made its return in June with a successful $750m FRN offering. The transaction was far larger than its last deal in August 1997, when it raised $500m in the Eurodollar fixed rate market.
In the interim the world has changed significantly for Japanese issuers and the JGGIs have been forced to face the reality of pricing without the triple-A rating that used to be taken for granted by issuers and investors alike.
While Standard & Poor's retains its triple-A rating for Japan, deteriorating sentiment - as well as the other ratings agencies' downgrades - has conspired to push pricing of JGGI issues to levels above sovereign credits of similar and even lower ratings.
Japan Highway's path back into the Euromarket had been paved by the former Jexim which had raised a $1bn FRN in February, marking the return of the JGGI issuers to the market.
By the time Japan Highway entered the market, Jexim was trading almost flat to Libor, having originally been priced at re-offer at 5bp over three month Libor. Japan Highway's transaction emerged at 2bp over Libor all-in, a price which secured strong support from an investor base that has become increasingly supportive of the financial sector reforms in the country and the nascent economic recovery. Euroweek discussed the issue and future plans with executives in the financial department at Japan Highway.
Q: Why were you absent from the international markets for almost two years?
We would have issued offshore in the financial year ended March 31 this year, but events conspired against Japanese credits. The Asian crisis, the weakening Japanese financial sector and concerns over the economy were compounded by the fallout following Russia's crisis and the LTCM debacle.
Although we had planned to tap the international markets as we had actually done so for 15 consecutive years, we finally decided to shift to the domestic funding because the funding costs offshore soared dramatically.
The return to the Eurodollar market this year marks the recognition by us and by the other JGGIs of a new pricing benchmark. However, although the cost of funds was higher than we would like, we were satisfied with the large size of the transaction and the strong support in the primary and secondary markets.
Q: Were you satisfied with the pricing achieved with this issue?
We can say that we were pleased with the overall transaction and the level of investor demand, given the situation in which the JGGIs find themselves. However, since the downgrading of Japan by some of the rating agencies, JGGIs have been obliged to issue in the international markets at above Libor, which we believe is too cheap given the split rating status.
Moreover, there is a real anomaly in that similarly rated sovereign issues and lower-rated names are currently able to issue tighter than we are. This is a situation that we believe will not persist for much longer.
Q: Did you attempt to communicate these views to your international investors before this latest issue?
As we were a triple-A issuer for so long, we are not familiar with the process and culture of investor relations. Now we are in the process of re-thinking our whole approach to investor relations.
For this transaction we were not sure that we would be issuing, which market we would tap or even which bank would be lead manager until the very last moment.
This transaction can therefore be seen as relatively opportunistic, a decision that we made literally at the last moment to access a window of opportunity that had suddenly opened. In the future, we will be making a more proactive effort to communicate with investors and to relay our company's message at large.
Q: What is your annual funding requirement?
We require approximately ¥5tr ($50bn) each year for capital investment and refinancing. Of this amount, we have traditionally secured some Y2tr from the so-called 'zaito' funds from the government's postal savings deposits.
Of the remaining ¥3tr, the bulk is sourced from internal cashflows from toll revenue. We finance the remainder in the domestic and international capital markets.
Q: There are some ¥100tr of redemptions anticipated next year by postal savings depositors out of the total ¥250tr. Intermediaries suggest this will make it more problematic for government agencies such as Japan Highway and the municipalities to tap into the zaito funds. Does this imply that Japan Highway is likely to be more active in the capital markets from next year onwards?
We are discussing the annual budget for the next financial year with government ministries, and so far no specific plan has been arranged for the funding.