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Issuers reap rewards with Samurais

14 Nov 2001

Japanese investors are struggling to pick up yield in their own domestic bond markets, where spreads on government agency, utility, corporate and even the weak bank sector are razor thin. Emerging market sovereigns have taken full advantage of the situation, issuing directly to them through the Samurai format. And now that investors have recovered their confidence following the Xerox crisis a year ago, foreign corporate credits are joining the party too. Mark B Johnson reports.

After a terrific year in 2000, Samurai market volumes are once again approaching impressive levels in 2001, albeit after a stutter in the first quarter.

According to John Higgins, head of fixed income research at Nomura International in London, the market has benefited from three core factors. "First, there has been structural issuance," he says, "for example from those borrowers with assets to finance in Japan. Second, there have been more emerging market issuers coming in to satisfy the demand for coupon hungry investors. And third, the introduction of real time gross settlement last year meant that foreign financial institutions operating in Japan have since needed more yen for collateral and settlement and have therefore self-managed their own deals."

Jack Gunn, head of primary markets at Merrill Lynch in Tokyo, is equally bullish on the state of the market. "New issue sizes continue to increase as the depth and breadth of the market expands," he says, adding that distribution and liquidity has greatly improved, as a larger number of transactions are being broadly marketed and syndicated. "Japanese investors, facing a dearth of domestic corporate supply, have gravitated to non-domestic credits," he adds. "At the same time, the euro and global yen markets have expanded as non-Japanese investors have become a key component of the yen bond investor base.

"In Japan there is so much liquidity but simply not enough supply of paper to soak it up. In fact, the supply of non-government paper in the domestic market continues to shrink. This means that domestic investors have no other choice than to diversify into foreign assets. The easiest route is to do so without currency risk in the Samurai and offshore yen markets and therefore the yen markets have a massive supply of natural liquidity in Japan."

Vince Purton, managing director at Daiwa Securities SMBC, Europe, says that the characteristics of Japanese liquidity in 2001 are not new.

"Most of the trends we saw last year have continued," he says. "There is strong investor demand and strong issuance, interest rates remain low, and the Bank of Japan maintains a loose monetary policy. There has been further credit diversification - emerging market sovereign and quasi-sovereign credits remain the core component, but private sector issuance from Europe and the US has also become more prominent.

For foreign issuers looking at the yen risk, says Purton, the equation is fairly simple: "The interest rate savings of a yen versus a dollar liability on a five year issue are such that the yen could strengthen beyond 100 to the dollar before currency strength outweighs this coupon advantage. Few analysts, if any, see the yen strengthening to that degree. In fact, as a firm, we see continued medium term yen weakness."

The Samurai market is benefiting from the search for new pockets of demand for their paper across the globe. "An ever increasing number of non-Japanese issuers are tapping the yen investor base to reduce reliance on their home markets and secure an alternative funding source," says Gunn at Merrill. "This diversification strategy has become possible due to a dramatic deepening and broadening of the investor base for non-Japanese credits."


The Samurai market has several key differences to the offshore yen markets, in structure, documentation and distribution. Samurai bond issues are public placements with paperwork overseen by the Japanese regulators. Samurai bond issues are targeted solely at domestic investors.

Global Samurai bonds have also become more prevalent. The Central Bank of Tunisia issued the first global Samurai in July 2000, selling ¥35bn in a deal managed by Merrill Lynch. "Global Samurai issues are registered with both the ministry of finance and the SEC," explains Gunn. "This is the only product where we can solicit investors without restriction in the three major markets - Europe, US and Japan - for a primary offering."

Currently, the global Samurai option is available only for sovereign and supranational issuers with no withholding tax certification requirements. Many Japanese institutional investors can purchase these bonds because they qualify as Samurai and are quoted on a daily basis by the JSDA.

In general, the shorter dated, higher coupon Samurai issues, such as those from the many emerging market issuers, tend to go to the retail buyers. These buyers focus on name and coupon and have little or no regard for spread comparables to the global markets. Around the five year maturity, the institutions tend to dominate, but, depending on the issuer, retail buyers might also participate. Further out along the curve, institutions dominate and pricing tends to mirror global spread norms.

"The relatively flat yield curve tends to mean that retail investors prefer paper of up to three years, as there is little or no incentive to go further out," says Kensey Green, deputy head of syndicate at Nomura International. "For the institutional buyers, they might be prepared to take greater duration risk in order to lock in returns on their portfolios and to try to match some future liabilities."

Several factors are driving the demand side of the equation, including the lack of domestic corporate bond alternatives; the extremely low yields on JGBs; the continuing high savings rate resulting in excess market liquidity; growing investor sophistication with regard to credit analysis; and the increasing desire for diversification.

The retail market has the equivalent of almost $12tr in financial assets, 55% of which are on extremely low yield deposits. Alongside the vast institutional funds controlled by the banks, the pension funds, regional banks, insurance companies and other specialist financial institutions, the total pot of financial assets is more than $25tr.

"We have demonstrated this year on several occasions that access to the Japanese retail investor is a vital diversification for issuers," says Stefano Ghersi, head of debt capital markets at Nomura International in London. "Bringing Brazil at 250bp through the equivalent dollar spreads demonstrated that fact. It also showed that the Samurai market is less volatile than the wholesale markets, which always tend to overshoot on the downside. The dollar and euro markets are increasingly correlated and investors tend to initially overreact to bad news, as was then coming out of Argentina and having an excessively negative impact on Brazil's international spreads."

"The Japanese retail market is the last remaining retail bond market in the world," Ghersi continues. "It has demonstrated huge price efficiency and the capacity to allow issuers to execute even during difficult times in the world's credit markets.

"Brazil had a long history in the market, and was familiar to investors who appreciated that the country had never defaulted."

However, Ghersi warns that this does not imply that the market will take any issuers. "The investment banks have a responsibility to try to select the emerging market credits which project the most stability," he says. "There is a danger in a generous market that it can be exploited and we certainly advise strongly against any deals that could later undermine confidence."

Ghersi believes that investor demand will continue to grow, for reasons of assets diversification, as well as regulatory factors. "The rules on bank deposit guarantees for the Japanese public, which were introduced after the 1998 banking crisis, are coming to an end," he says. "In a country with such low returns available from traditional savings, from government bonds even from domestic corporate credits and from the weak stock market, investors are seeking diversification and are prepared to take on more credit and duration risk in order to enhance their returns. The result is that the ability of lead managers to sell more paper and new names has radically improved in the past few years."

The fundamentals of the Samurai market, however, remains largely unchanged, despite the growth in recent years. "The Samurai market continues to be dominated by Japanese buy and hold investors," says Purton at Daiwa. "There is still little trading in the secondary market and small foreign participation on most deals, albeit with a few exceptions."


The year to date has been another strong period for emerging market issuers. The Brazil deal discussed by Ghersi was issued in late July and stunned the international markets. At ¥200bn, the two year Samurai was the biggest yen transaction ever launched by an emerging markets borrower. The deal was done despite the Latin American region being beset by the Argentine crisis. Bookrunner Nomura Securities and joint lead Daiwa SMBC were even able to increase it from an original ¥180bn.

The deal was the largest single tranche Samurai bond issue, matching the Kingdom of Sweden's 1993 Samurai. However, it is by far the largest by any emerging market issuer.

The deal's success defied speculation that Brazil would be forced to scale down the offering due to negative developments in Argentina and is in stark contrast to the rejections Brazil suffered in both euros and dollars in the months before the jumbo Samurai offering.

"We could have done a ¥280bn-¥300bn deal," says Ghersi at Nomura. "The deal proved just how valuable the yen markets are to issuers of all kinds. It proved that the Samurai market at that time was the most liquid market on the planet, and it still is."

The deal provided an important windfall for Brazil in an unforgiving environment. In a bid to increase its warchest to defend against any Argentine contagion, Brazil decided to raise its borrowing target from $5bn to $7bn this calendar year. The jumbo Samurai provides the sovereign with $1.6bn of funds, bringing it about $400m short of the new target.

The leads forged ahead with the deal despite worsening emerging market conditions at the time. In the previous week, the bonds of many Latin American borrowers plunged on news that Moody's had downgraded Argentina from B3 to Caa1, with the possibility of further cuts. During the week of the Brazil offering, the markets again suffered as evidence emerged that the sharp decline in local Argentine deposits was continuing.

Nonetheless, the structure of the Brazilian deal, years of persistent marketing of the Brazilian story in Japan, an emphasis on Brazil's perfect payment record in yen (its first Samurai was issued in 1973) and its strong solvency position boosted both retail and institutional demand to unexpected heights.

The leads employed a strategy similar to that used in the Euromarkets, whereby initial retail demand was fuelled by the short two year maturity and, by Japanese standards, juicy price talk of a 3.5%-3.95% yield. The leads then lured institutional investors by spreading the word that allocations to retail buyers would be strongly scaled back, thus ensuring good aftermarket support.

In the end, the offering was 70% sold to retail accounts and 30% to institutions. Institutional interest was strong even though, on a swapped basis, the deal came inside the Brazilian dollar curve by at least 200bp and flat to Brazilian euro spreads.

The 3.75% coupon equated to 430bp over US Treasuries, while Brazil's 2004 dollar global was trading 688bp over dollar swaps and its 2003 euro issue was then equivalent to around 380bp over dollar swaps.

"The two year maturity was key as normally the shortest is three years," says Ghersi. "There has been little issuance in the two year part of the curve and those foreign corporates that have sought to take advantage of the strong Japanese retail bid by issuing in two years have offered significantly lower spreads than Brazil.

"At that time, a term deposit account in Japan was offering 0.2% per year and that has since fallen again. Little wonder that a deal like Brazil's was so attractive to retail and institutional investors alike."

Despite the extremely volatile situation in Argentina at the time of launch, Japanese investors were prepared to take Brazil risk because the Samurai market is dominated by retail buyers who have no need to benchmark their investments against an index and who are not obliged to mark their investments to market.

"Here you have an investor base that has a time horizon of two years, so they look at Brazil's payment record and solvency situation and that is a completely different framework from the institutional one that you see in the dollar markets," says Ghersi. "Total demand from our retail branch network alone exceeded ¥150bn, while the actual allocated portion allocated was ¥68bn. This was certainly a key factor in helping bring in strong institutional support, because we could assure them of unfulfilled retail demand."

Nomura placed the bonds with almost 30,000 individual investors and the total number of retail tickets exceeded 50,000.

Nevertheless, Japanese investors are still cautious, and will only consider issues from certain borrowers. For Latin America, the list is very short and consists almost solely of Brazil, Mexico and their quasi-sovereign entities. Japanese bankers are hopeful they will be able to convince either Mexico or credits such as Pemex to tap the Samurai market before the end of the year, as well as possibly resurrecting a Colombia Samurai that was sidelined due to market conditions a few months earlier.

"The Argentinean situation had affected other emerging markets, particularly Brazil, which received very negative press coverage in Japan," says Green at Nomura. "One article we spotted talked of 'chaos' and 'imminent default', but we managed to settle the market down so that they could differentiate clearly and could understand the solidity of Brazil, at least on a two year view."

Against that background the Republic of Colombia Samurai was put on hold, as well as the Philippines' planned $500m Euromarket deal.


Aside from the familiar names from the Asian and Latin American economies, emerging sovereign issuers from eastern and southern Europe, from the Middle East and from Africa have also been more common in the past two years, since the concerns over the Russian crisis died down in early 1999.

Daiwa arranged the Republic of Croatia's third Samurai issue in February, selling ¥25bn of five year notes at par with a coupon of 2.5%. Croatia is rated BBB- by Standard & Poor's (S&P) and BBB by local agency R&I. Daiwa originally planned a ¥20bn issue, but the deal was increased to ¥25bn, the maximum size Croatia required, following strong demand in premarketing. The price equated to 152bp over yen Libor.

"The issue was targeted exclusively at retail investors, and the syndicate structured to focus on houses with good retail placement," recalls Purton. "Investors were attracted by the coupon pick-up versus equivalent domestic bond alternatives, and by the strong credit story behind the issuer."

Croatia is a credit many Japanese investors know well from previous issues. The country first issued Samurai bonds in December 1999 and returned in the summer of 2000. This was its first issue to be targeted solely at retail demand, which will also have helped Croatia gain exposure throughout the whole range of potential investors in Japan. The terms and conditions achieved Croatia's improving standing with Japanese investors and its improving spread performance in other markets.

"Croatia has a very mature relationship with the Samurai market, enabling it to choose the optimum structure at any particular moment," Purton explains. "The market has proven in the past its competitiveness for Croatia in terms of cost of borrowing, maturity and volumes raised. This time Croatia had rightly focused particularly on cost issues at a time when it had a limited borrowing programme and a healthy debt maturity profile, and therefore opted for a five year maturity to maximise retail demand."

Hrvoje Radovanic, assistant minister at the ministry of finance of Croatia, said after the issue that he was "delighted" with the deal. "We feel our credit is understood here," he added, "and know that the market is always going to be competitive regardless of our precise strategic objectives at any given time, and regardless of which investor base we target. With this issue, Japanese investors have again enthusiastically endorsed our positive story, and we now look forward to European investors following their lead."

Daiwa's Purton believes that the result of the Croatia deal proves without doubt that being a regular issuer reaps rewards. "The Samurai market continues to be a name recognition market," he says. "The international credit ratings of the country remain the same as in late 1999, but there is worldwide recognition that the country's political and economic outlook had improved and Japanese investors were prepared to endorse that with a lower coupon and a considerably lower spread to Libor."

In the third week of June, the Republic of South Africa launched its third Samurai issue, this time raising ¥60bn in the unusual six year maturity. Daiwa Securities SMBC and Nomura Securities were joint bookrunners.

The republic is rated Baa3 and BBB- by Moody's and S&P and sold the notes at par with a coupon of 2%. By that time, the market had rallied and yields were lower, allowing South Africa to achieve a lower coupon than Croatia, despite the slightly longer maturity.

South Africa is a familiar borrower in Samurai format. After its debut five year ¥30bn Samurai in 1995, the country returned in 1997 with a ¥40bn seven year deal. Both transactions were arranged by Daiwa. Since that issue, its credit story has continued to improve. As well as the positive outlook from R&I, South Africa's Moody's rating of Baa3 is also on positive watch, and its S&P rating was upgraded to investment grade in 2000 and is stable.

"The transaction was originally mandated to us on an indicative coupon of 2.25%-2.35%," recalls Purton, "but this was quickly reduced to 2.0%-2.25% following a significant tightening of the domestic South African market and positive initial feedback to the issue from target investors. The size was originally slated at ¥30bn, but we secured orders for almost three times that amount and completed the deal at ¥60bn."

Daiwa chose the six year maturity because it best fitted the country's debt maturity profile. "The ability to pitch a deal on any part of the curve shows just how flexible this market really is," says Purton. "In other markets, investors focus more on liquidity and want specific benchmark maturities, for example five, seven or 10 years. In this market, there were no eyebrows raised by pitching the deal at six years because there is no negative implication whatsoever in issuing in what other markets would deem strange maturities. Ultimately, this is because it is a buy and hold market, and Samurai bonds are seldom traded."

The notes were priced at a yield equivalent to yen Libor plus 141bp or JGBs plus 147bp. The price was equivalent to German Bunds plus 198bp, thereby comparing favourably with the spread on South Africa's only other public transaction this year, the Eu500m 7% bonds due in 2008.

Despite the aggressive pricing, the deal was sold to a wide range of investors. The joint bookrunners reported that around 40% of orders came from retail accounts and 60% from institutional accounts in Japan, the rest of Asia and Europe. Institutional accounts included government related institutions, life insurance companies, regional banks and corporates. Many accounts were first time buyers of the South African credit.

"The Samurai market is very flexible at the BBB level," adds Purton. "At those ratings, lead managers have the flexibility to pitch issues at either retail or institutional accounts, or a mixture of both. At the BB level, deals tend to be placed more with retail accounts and at the single-B rating, deals are often placed exclusively with retail investors. In terms of maturities, retail buyers focus on the shorter dated paper, although for selected credits they will go out to six or seven years."

A top level delegation from South Africa headed by Maria Ramos, director general of the national treasury, went to Japan to spread the story, which focused on South Africa's success in achieving a macro-economic balance of steady growth alongside falling interest rates, declining inflation and current account progression from deficit to surplus.

The country is also enjoying rising foreign direct investment and accelerated privatisation coupled with structural reform. In addition, South Africa's low and declining debt ratios, small external debt and rising revenue levels were seen as major positive points, both on an absolute basis and relative to South Africa's peer group. Finally, the South African team emphasised the stable and transparent political situation, the well supervised banking sector and the sophisticated infrastructure in South Africa.

"The response of Japanese investors, reflected in both the demand and the spread, is a vote of confidence in the South African economy and the policies that we have pursued over the last six years," said Ramos after the issue. "The deal was very competitively priced and demand was robust."

Brian Molefe, the deputy director general at the ministry of finance, added: "There is definitely an increasing appreciation and admiration of our story from the international financial markets. This is very good for South Africa."


Self-managed deals for financial institutions operating in Japan have also been a source of growing supply in the past two years.

As of January 4, 2001, Japan's Real Time Gross Settlement System (RTGS) incorporates an electronic book entry system, similar to the FedWire, effectively turning all registered bonds into taxable bonds. With taxable bonds, only 80% of the interest accrual will be paid. Non-Japanese holders of JGBs are required to hold their JGBs at the Bank of Japan, incurring additional cost as the BoJ requires the services of a local custodian.

"Since the implementation of RTGS, it is no longer possible for non-resident investors with a global custodian to avoid withholding tax through the above-mentioned methods," explains Gunn at Merrill. "All bonds are taxable unless held with a resident Japanese custodian. This not only caused foreign investors to seek diversification out of JGBs, but has also created a demand from foreign banks operating in Japan for larger amounts of yen funding. Hence, the arrival since last year of many self-managed deals for the international investment banks."

Merrill Lynch was one of several foreign financial institutions that tapped the market this year. The bank self-managed a ¥105bn three tranche deal that was priced in June. "The transaction registered good interest due to the investor familiarity and comfort with Merrill Lynch's name," says Gunn. "Merrill Lynch has a high degree of name recognition in Japan thanks to our presence here in the institutional and retail arenas."


The increased participation of corporates in the Samurai markets is a major preoccupation for bankers. "One of the key driving forces for the development of the corporate market in yen has been the expansion of foreign operations in Japan, whether organically or through acquisition," says Andrew Asbury, head of fixed income at Daiwa SMBC in London.

Corporate issuers seeking to fund yen assets showed an increase last year due to a sharp rise in foreign direct investment in Japan. The motivation on the part of these borrowers to fund directly in yen increased due to the introduction of FAS133, a US accounting rule that obliged corporates to mark to market cross-currency hedges they took on (foreign issuers of course produce their final accounts in their national currency).

"However, that rule has been softened somewhat this year with the introduction of FAS138, taking some of the incentive away from foreign corporates that need yen to actually issue in yen directly," says Gunn.

Deutsche Telekom successfully returned to the yen markets in late February with its ¥160bn multi-tranche debut Samurai launched via joint bookrunners Daiwa Securities and Mizuho Securities. Deutsche Bank, Nikko Salomon Smith Barney and Tokyo-Mitsubishi Securities were co-lead managers.

Deutsche Telekom's issue was important because, as Asbury points out, the market had remained closed to corporate issuance since early November 2000 following the problems with Xerox. "[The Xerox crisis] undermined investors' confidence in foreign corporate credits," says Asbury. "This caused under-performance in the relatively illiquid secondary market." Xerox sold Samurai bonds last year, but was soon aggressively downgraded and the value of its debt around the world slumped.

With its deal, Deutsche Telekom became the first major telecoms issuer to tap the Japanese domestic bond market and it was the fourth largest Samurai issue to that date.

The global telecoms sector has been under pressure since the middle of 2000, when the sheen came off telecoms stocks in the stock markets and debt market investors began to have concerns about cashflows and overstretched balance sheets.

However, this did not deter Deutsche Telekom from braving the Samurai in the first week of March amid reports of a possible ratings downgrade. The German telco sold ¥160bn of bonds in a four tranche issue that closed 60% larger than the ¥100bn that had been expected. It became the third largest ever Samurai issue (after Chrysler and Citigroup).

The objective was to diversify funding," says Asbury. "The target investors were traditional Samurai buyers, which are relatively underweight in telecoms sector paper. In doing so, we also managed to achieve good pricing relative to global alternatives."

Ashbury notes that the multi-tranche structure is not a new feature and was frequently used last year to address demand from different investor types. "Although large volumes can be generated in short dated maturities of less than three years, we avoided these maturities as the investor universe is limited and can be accessed through regular Euroyen issuance," he says.

"A noteworthy aspect of the deal was a new feature introduced for the first time in the Samurai market, namely the notes offered a step-up that allows the coupon be raised by 50bp in the event that two out of three ratings [from Moody's, S&P and R&I] are downgraded to the triple-B category, the coupon will be increased by 50bp."

During the week of the roadshow, several telecoms companies around the world were downgraded or reviewed with negative implications as Orange UK's IPO was poorly received. Both equity and bond markets were depressed and the Deutsche issue deal was postponed.

The transaction faced a last minute complication when S&P placed Deutsche Telekom's A- long term debt rating on CreditWatch with negative implications the night before the deal's launch. Moody's had already reduced its credit outlook on Deutsche Telekom's A2 credit rating to negative from stable earlier this month. But the deal still managed to capture interest from investors enticed by the coupons.

"Those investors uncertain about the credit had already dropped out and the impact on the final amount remained minimal," says Asbury. "Accordingly, the pricing went ahead without a problem, although the final spreads were some 10bp-20bp wider than we had hoped for when we began marketing."

According to the two lead managers, life insurers, regional banks and local institutions were strong participants for all of the tranches of the Samurai issue. Banks also participated strongly in the FRN, central institutions were evident in the three year fixed rate paper, and asset managers bought both the three year tranches. Agricultural institutions showed interest in the five year paper.

"The deal was also facilitated from a relative absence of telecoms debt in the domestic bond market," recalls Asbury. "The few deals launched by telecoms issuers in the Samurai market have been relatively short dated paper, to a fairly small, select group of issuers."

Deutsche Telekom last publicly tapped the international yen markets in June 2000, selling a ¥90bn five year deal with a semi-annual coupon of 1.5%. Deutsche Bank, Goldman Sachs and Morgan Stanley Dean Witter arranged that deal.


IBM was the most prominent name to champion the diversification of the Samurai market in 2000 towards corporate credits. In early September this year, French auto manufacturer Renault continued the market's expansion by becoming the first BBB rated European corporate to sell Samurai bonds. The deal was rated Baa2/BBB/BBB+ by Moody's, S&P and Fitch and A by R&I.

Renault has become virtually a household name in Japan since its purchase of a controlling stake in Nissan in 1999. That helped the company secure ¥50bn in a five year issue through joint lead managers Daiwa Securities SMBC and Merrill Lynch.

"The general appeal for Renault as an issuer has been the fact that it is an infrequent issuer in the capital markets," says Asbury at Daiwa. "This was also a strategic deal for them in order to establish a relationship with institutional investors in Japan."

The deal was priced at par, with a semi-annual coupon rate of 1.29% that yielded 73bp over yen Libor at launch. Demand was not as strong as some had expected, partly because of a sudden spate of issuance in the local market, including a ¥100bn placement from Sony.

Both Baa2 rated Italian car maker Fiat and A3/A- rated US-German manufacturer DaimlerChrysler had arranged Samurai issues in the past year. Fiat launched a ¥40bn five year issue in June 2000, which has a coupon of 1.5% and was priced at 25bp over yen Libor. DaimlerChrysler followed with a ¥220bn multi-tranche issue in late November 2000, with a ¥75bn 1.75% five year tranche priced at 50bp over.

Renault said it planned to use the proceeds of the issue in connection with its 36.8% controlling stake in Nissan, implying it would not need to swap the proceeds from yen. However, the company would still have had the option of issuing in dollars or euros and swapping into yen.

"There are a limited number of Japanese investors that can invest in foreign names with a BBB [S&P] rating so the transaction was quite large and spreads in general have changed for the auto sector as the global economy has weakened," says Sam Amalou, executive director for debt origination at Daiwa SMBC Europe. "However, in some ways Renault can almost be considered a domestic issuer because of its Nissan operations and this, combined with its scarcity value, meant that the increased domestic issuance was not a concern."

Bankers hope that more foreign corporates will consider the Samurai market as an alternative to the euro or global yen markets. The market is attractive because of the razor thin spreads domestic Japanese credits achieve locally, which demonstrates just how hungry local investors are for yield. If an institution can achieve an extra 20bp per year on five year paper, that fund manager is in fact increasing his yield by around 15%-20% per year, due to the extremely low nominal interest rates on JGBs.

In the same week as Renault issued, Fuji Heavy Industries, rated A- by R&I, paid a spread of 27bp on its ¥30bn seven year domestic deal. However, bankers who worked on the Renault deal reported that the 73bp spread the car maker paid was very close to the equivalent spread of its outstanding euro currency bonds.

"It is very difficult to compare prices paid by local investors for local credits in the domestic market," says Asbury at Daiwa. "There is always a premium to be paid by foreign issuers in local markets, especially if it a debut deal. However, the key is the comparable pricing for any issuer against other international markets available to them."

"An A2/A credit in Japan would be able to issue bonds domestically at about 10bp and 15bp over JGBs at three and five years, respectively," says Green at Nomura. "An international credit with a similar rating would probably have to pay 40bp-50bp in three years and 50bp-60bp in five years in the dollar markets. This implies that because of the massive liquidity in the Japanese market, domestic institutions pay no heed whatsoever to international spread comparables, this despite living in a weakening global economy whose problems have been worsened by the September 11 attacks."

Green adds: "It is extraordinary that as corporate spreads across the world's markets have been underperforming since last year, corporate spreads in Japan have stayed extremely tight and in some cases have come in further. And this is despite the collapse of Mycal [one of the largest corporate defaults ever in Japan] and the weak stock market eroding banks' profits and balance sheets."

In August, Sony sold ¥50bn of 10 year and ¥100bn of five year notes at a spread to JGBs of 12bp-13bp. "Sony is treated by the domestic investment community almost as if it is a government agency, such is the popularity of the name," says Green. "Sony is a special case admittedly - it trades in the offshore markets inside its US and/or European comparables such as Siemens or Honeywell."

Toyota Motor Credit Corporation spreads pre-September 11 were around 9bp-10bp bid/offer over dollar Libor. By late September that spread had blown out to the mid-20s, in line with corporate spreads throughout the world, at least outside Japan. Toyota Motor Finance recently issued five year paper in the local market at around 6bp over yen Libor. Meanwhile, IBM was one of the first major issuers back into the global dollar markets after September 11. It paid 30bp over Libor at re-offer, equivalent to 117bp over Treasuries.

"One can only conclude that the domestic market is to some extent a law unto itself," says Green. "But this is good for both domestic and international issuers, as the market offers immense stability rather than the volatility that often afflicts the international debt markets. Prospects for the Samurai market have seldom been more encouraging." *

Bookrunners of all Samurai issuance (Year 2001 to date - October 29, 2001)
PosManager or groupAmount ¥ bnNo of issuesShare %
3Merrill Lynch245.001117.81
5Salomon Smith Barney55.0034
6Morgan Stanley50.0013.63
7Bank of Tokyo-Mitsubishi40.0022.91
8Lehman Brothers30.0012.18
9=Bear Stearns25.0021.82
9=Kokusai Securities25.0021.82
Total eligible issuance1,376.0035100
Source: Dealogic

Samurai volume by S&P rating (Year 2001 to date - October 29, 2001)
RatingAmount $mNo of issues
B Rated5,519.1511
A Rated5,104.1722
Source: Dealogic

Samurai issuer league table (Year 2001 to date - October 29, 2001)
PosManager or groupAmount ¥ bnNo of issuesShare %
1Federative Republic of Brazil280220.35
2Deutsche Telekom160411.63
4Merrill Lynch10537.63
6Republic of South Africa6014.36
7Bear Stearns Companies5023.63
8=Korea Development Bank5013.63
8=Morgan Stanley Group5013.63
Total eligible issuance1,376.0035100
Source: Dealogic Capital Data

14 Nov 2001