Europe’s banks leading the world into Japan
European banks have been the mainstay of the Samurai market over the last 12 months, and the market has repaid them with loyalty. When European markets were shut during the Greek crisis, Japan stayed open for familiar names, rewarding those who have made the effort to build relationships and a track record. Here, eight issuers and two banks describe their experience.
Participants in the roundtable were:
Sam Amalou, managing director, head of debt capital markets, SMBC Nikko, London.
Ola Littorin, first vice president, head of long term funding, Nordea Bank, Stockholm
Dennis Haring, vice president, long term funding, bank treasury, ING, Amsterdam
Lauri Iloniemi, senior vice president, head of group funding, Pohjola, Helsinki
Kazuhide Tanaka, head of long term funding – Japan, Rabobank, Tokyo
Vince Purton, managing director, head of debt capital markets, Daiwa Capital Markets Europe, London
Thor Tellefsen, senior vice president, head of long term funding, DNB Bank, Oslo
Sabrina Di Gregorio, director, co-head of long term debt execution, treasury, Credit Suisse, London
Peter Green, senior manager, public senior funding and covered bonds, Lloyds Banking Group
Roland Charbonnel, director, group funding and investor relations, Groupe BPCE, Paris
Chris Wright, moderator, GlobalCapital
: It has been an interesting year for the Samurai markets — one in which, while the Greece crisis closed many other world markets, yen proved itself as a differentiated alternative by staying open throughout. Sam and Vince, can you set the scene with the issuance patterns you have been seeing?
Sam Amalou, SMBC Nikko: It has been comparable to last year in volume terms and financials are again dominating issuance. But we have experienced a greater mix of formats being utilized to access the yen markets. In 2014 almost 90% of public yen issuance was concentrated in the Samurai market; to date we are seeing only 60% on the Samurai side. Pro-Bond is having more emphasis, and we are seeing a resurgence of Euroyen from large US corporates in particular, such as Procter & Gamble or Apple. It is much more diversified.
Vince Purton, Daiwa Capital Markets Europe: There have been 18 Samurai in calendar 2015, three global yen, two public Euroyen and two Pro-Bond. So it’s two-thirds to three-quarters Samurai issuance. We are definitely seeing a bit more variety: global yen has come back, Pro-Bond is bubbling, and there is more of a discussion with issuers now about formats than there used to be. We’ve also seen one previous Pro-Bond issuer issue a debut Samurai.
Compared with where we were 12 months ago, Japanese investors are showing significantly increased risk appetite. Depending on the specific investor that can involve looking at a Pro-Bond with
less disclosure than Samurai; it might mean longer tenors, or looking at sub debt — a huge development from a year ago — or more structured yen Uridashi. There is also some movement down the rating curve.
: Let me turn to the issuers now, all of them repeat issuers. For each of you, what brought you back to the yen market and how was your experience this time different to previous visits? Let’s start with those issuers who came in a cluster in the middle of the year, such as Credit Suisse.
Sabrina Di Gregorio, Credit Suisse: Before our December deal, we had been out of the market for four years. We wanted to be in this market strategically, to diversify our investor base, and we had a chance to observe how resilient this market is.
For our July issue we found ourselves in a challenging situation. The lead time is very long for a Samurai compared to other deals; time to market and access is not something I would consider easy to manage. We had planned to issue before the summer break and by the time we were ready we had only one week before entering into blackout. But when the Greek crisis started to intensify, and Chinese stocks started to fall, we thought it would not be possible to go ahead. Clearly, we were reluctant to move.
But the feedback was that investors were there for us. Because of their buy and hold nature, they were able to look beyond the temporary market shocks and to make an assessment based more on long-term macroeconomics and credit views. Ultimately we decided to go ahead with official marketing, and achieved a very substantial and satisfactory size, slightly smaller than our December deal but with a greater number of investors. The resilience of the market makes Samurai issuance a very important part of our tool kit.
Green, Lloyds: We look at the Japanese market as a diversification opportunity. It is a group of investors we wouldn’t normally see in other currency trades we bring to market. While we first issued Samurai in 2012, given the evolution of the group’s balance sheet our overall funding requirements had reduced in 2013 and 2014. Our deal at the back end of 2014 was a ‘reintroduction’ trade into the Samurai market, and we were pleased with the evolution in terms of deal size when we came back in June this year. There was also a greater level of investor engagement: they really started to grasp the improvements in the overall credit story of Lloyds, and that manifested itself in bigger order sizes from some core investors.
As a market, it is a strategic fit into the overall funding toolkit that we have: a deep and strong investor base. Because of the lead time it takes to bring a deal to market, you can never quite guarantee what the market backdrop is going to be like when you get to do the trade, and our experience was very similar to that of Credit Suisse. There were concerns about Greece impacting European markets, and there were no guarantees we could have done a deal in euros at the time, but we received great support from the Japanese investor base. They appear to take the attitude that once they are engaged, they continue to be throughout the process, despite what the headline risks may be. We were encouraged by the experience.
Ola Littorin, Nordea Bank: We did our fourth Samurai earlier this year. Our approach to the Samurai market is to be a regular issuer on an annual basis. In terms of strategic value we see the diversification as being important, with an investor base complementary to other international investor bases. The fact that you are a regular visitor adds value in the eyes of the Japanese investor. It incentivises existing investors to look at our name. In the transaction we did in May, we were able to secure a large number of regional orders. It’s something we would expect to continue in following transactions.
: How has that regional participation changed over your four deals?
Littorin, Nordea Bank: As we started our Samurai issuance in 2012, the regional distribution was rather thin. As we have established our name as a high quality regular issuer we have seen a stronger following from regional accounts. In the latest transaction regional banks and Shinkin banks accounted for close to 50% of order numbers.
: How about those issuers we haven’t seen this year?
Lauri Iloniemi, Pohjola: We have yet to issue this year, but it’s early days still. As Ola said, we are planning to issue every year, and for us it is a diversification exercise — that is purely why we are in the Samurai market. The regional investors represent true, added diversification: in 2014 we visited the prefectures of Gifu, Aichi, Shiga and Kyoto, and this year we have roadshowed in Wakayama, Mie, Hyogo and Okayama, so we are really putting a lot of effort into the regional market. We plan to continue to do so in future.
: Are we likely to see you later this year?
Iloniemi, Pohjola: We have stated we plan to issue every year, but that’s always market permitting. There are no guarantees in this market.
Thor Tellefsen, DNB Bank: DNB has two outstanding Samurai transactions. We did one in January 2012 and one in January 2014, but we haven’t been in the market for one and a half years. DNB has somewhat more limited senior needs, so I cannot definitely say that we would issue a Samurai each year. We have clearly said, however, that the Japanese investor market is very important to us.
We want to look more broadly at this market than just Samurai transactions. If we have limited needs, it’s not necessary that we go for a Samurai every time: the documentation is a burden, it takes a lot of time. It’s a bit like the 144A market. The market may look great when you start, but you never know what the market will be like when you finalize the documentation.
But we go on an annual roadshow, keeping the investor base up to date on the DNB story. We are clearly planning to utilize the investor base going forward, but not necessarily on an annual basis.
: I have left Kaz, Roland and Dennis to last, as each of you represent something different: Rabobank and BPCE bank capital, and ING Pro‑Bonds. Starting with Kaz, Rabobank is the biggest of all Samurai issuers, issued in size again recently, and broke new ground at the end of last year with your subordinated debt transaction. Tell us about your experience.
Kazuhide Tanaka, Rabobank: First of all, the Basel III compliant tier two transaction we did last December was the inaugural tier two in the Samurai market. We were very pleased with that. It did take a lot of work, though: about 18 months of work with the dealer community, as well as educating investors on the tier two concept.
When we first started the process it was difficult because a tier two issue had not been issued in Japan, even by Japanese banks. So while investors were politely willing to listen to discussions, eventually they all said that unless one of the megabanks comes first, they were not going to put their hand up for a Samurai.
Fortunately, in June 2014, they started coming one after the other, which essentially allowed their credit approval process to go one step beyond that and consider a foreign name for tier two. It was a good diversification play from the investor point of view, because they were getting a relatively highly rated product with an extremely high yield compared to anything available domestically, and we have some exposure in the market so investors are familiar with us.
We had to educate investors on the concept of bail-in in European terms versus the Japanese processes, which are quite different. Having surmounted that barrier, we did manage to do a trade in December, and a reasonable inaugural transaction at over ¥50bn ($415m). A number of issuers have followed since, and a few more are considering going to the market.
As for us, we have to be pragmatic about coming again: we can’t issue bank capital on a frequent basis, especially to the same investor base. We’ll take a look in the intermediate future to see if it makes sense again.
Going to our most recent deal in May, we were very pleased with that transaction, because in the intervening period we had not issued in the senior Samurai space for a year. That left a lot of credit limits open with investors to buy our name. We were very pleased with the overall size of the transaction; the five year fixed rate tranche — which is almost always the core tranche of any Samurai transaction — amounted to ¥109m. We rounded that out with a 10 year, which was a flavour of the month at the time, and still is for some investors because of the low rates that still exist and the almost non-existent spreads on domestic product.
Roland Charbonnel, BPCE: We issued our first Basel III compliant tier two transaction in January 2015, right after Rabobank. So it was the second one in the Samurai market and the first one for a French bank. It went reasonably well with a size of ¥48.3bn and satisfactory spreads roughly in line with our funding levels in euros. The investor profiles were, however, quite different from the investor profiles in a senior unsecured Samurai bond issue: much less traditional lifers, asset managers and trust banks, and more un-usual investors like corporates, associations, schools, universities and so forth. One of the challenges is to bring some of the large institutional investors to that bank capital space. In addition to new transactions which have been executed since then, we feel that more education of these investors is definitely required and we are determined to do it. The dealer community as well as R&I, our new Japanese rating agency, are going to help us achieve that.
We priced our latest senior deal on July 1, right in the middle of the Greek mess. It was not the easiest deal to do.
The fact that we were able to do that transaction right in the middle of the Greek crisis was remarkable. That is definitely a sign of the resilience of the market. We had already engaged investors because we did a non-deal roadshow at the beginning of June, and a few significant investors, such as the Japan Postbank, were already aware that we were coming to the market. If we had not done that roadshow, it is unlikely we would have been able to come.
That was our sixth Samurai bond issue.
: Is it difficult to do something new in Japan?
Charbonnel, BPCE: It’s not difficult to do something new as long as you put in the time and effort to explain what you are trying to achieve.
: Vince and Sam, what are you seeing in bank capital and how might it develop?
Purton, Daiwa: The key thing, as Kaz said, is that we had been looking at the sub debt format for a year to 18 months, but the crucial foundation stone was having the domestic banks issue, which they finally did last summer. Then, the whole dialogue of bail-in and what it means began to percolate through the investor base. There are one or two accounts that are more advanced in their internal processes on this, and some that are more cautious about going down that route. There’s a lack of standardisation with the bail-in language, it is very country specific what it means, and how the arbiter at the point of non-viability might act. That lack of standardisation means investors have to look at deals on an individual basis.
But the deals we have had — Rabobank, the three French issuers — those have been very well received. Because there are some investors who are not going to buy that product, size expectation has to be a little lower: Kaz was successful in raising over ¥50bn, other issuers have been just shy of that, whereas in senior paper you can do ¥100bn quite easily. So on a volume basis it’s not equivalent.
There is a rating issue as well: if you want to get index eligibility to maximize placement, you need to get a single-A category rating from the designated agencies. The value of a Japanese rating is increasing, because from the domestic rating agency perspective, the credit differential between senior and sub debt is different to at least one of the major Western agencies, meaning there may be value in getting a strong local rating for sub debt.
Sub debt issuance is a huge development. The Samurai market has been senior format forever, and following these debut tier two trades the debate is invariably going to expand into AT1 as well — but again, we will have to see the domestic banks reassure the investor base by being the leaders. You’re never going to get a new product in the domestic market that starts in Samurai.
Amalou, SMBC Nikko: We’ve talked about the low rate environment in Japan, and that is very much causing investors to venture into more risky instruments and has definitely helped the process of developing that segment of the Samurai market. We have seen four subordinated issues so far, and their size may not be that large in the context of senior transactions, but if you look at historical Samurai trades, they tended to be small five to 10 years ago too, so there is probably a similar process underway for subordinated debt. It’s a process of education about the product and the credit behind it.
What we like about subordinated product is that it barely overlaps with what issuers are doing with senior issues. We issue in maturities of 10 years, whereas senior is focused on five. Investors participating in tier twos offer further diversification.
: Would Credit Suisse consider doing a tier two deal?
Di Gregorio, Credit Suisse: Not so much for us. We have had a significant senior funding requirement over the last couple of years. We are not focused on traditional tier two, given it is not aligned with the Swiss capital market regime. During roadshows investors were interested in discussing developments around the Swiss resolution framework but for us, capital issuance in Japan is not in the immediate future.
Green, Lloyds: For us it’s something that we do look at, but our immediate requirements for tier two have been lower given that we are in excess of 21% from a total capital perspective. The focus this year has been very much on funding.
All our subordinated debt will be issued out of the holding company, and senior funding is being issued out of the operating company. Our shelf in Japan is out of the operating company. Before we would be able to access the yen market in a sub debt format, we would need to think about the issuer structure and establish a new shelf, which adds time, complexity and cost. The market still lacks clarity on what final loss absorbing capacity requirements will be, though we expect to have more clarity on that in the not too distant future. It remains a work in progress: a focus for us, but not an immediate priority.
: And finally, Dennis. ING was very much a pioneer in the Pro-Bond market, and for a while looked like it was waging a lone fight. But now there are other issuers and the market is gaining maturity. What’s been your recent experience?
Dennis Haring, ING: It takes time for a market to develop, just as we have seen with the 144A market. If you look back, we did our first deal in 2012, and since then there have been some 12 issuers in total who have applied for registration, and we have seen 20-odd deals. So it progresses slowly but surely. I’m very happy with that development.
: How was your last deal in June?
Haring, ING: The Japanese market is very important for us, and a way to diversify the funding mix. We were funding ourselves especially at the shorter end in euros, and did dollars in three and five years. We were thinking about maybe repeating that later in the year, which we did. That’s why we thought to diversify away from those buckets through the Pro-Bond market, and also to entertain the strategic relationships we have with those investors. We had the books open in the week that the news on the Greek referendum hit the screens. It was a bumpy road, but in the end the investors were loyal to their orders, which in my view is proof of true diversification.
: We were talking about subordinated debt; could that be accommodated in Pro-Bond?
Haring, ING: I don’t think we have made up our minds yet. I have the feeling the inclusion of subordinated language is a bit easier in Pro-Bond than in Samurai, as is the case in the senior deals. But I think first one should see a more developed Samurai subordinated market, and then adapt the Pro-Bond programme to subordinated. That may need some time and internal discussions, but I do see strong benefit in including such language at some point in time.
: Would other issuers consider Pro-Bond? How about those that have not issued Samurai yet this year?
Tellefsen, DNB Bank: That’s hard to say. There are obvious advantages with a Pro-Bond when it comes to documentation. The question is which investors are you reaching and who are you leaving out. But I would definitely not rule it out.
More generally, we are seeing that a lot of the really large Japanese investors are now significantly more willing to invest in product that is not necessarily Samurai. We used to say that the Samurai market is very important for us; now we have redefined it that the Japanese investor market is important for us. On our next Asian roadshow, we will focus much more on general DNB credit for all products, rather than just Samurai.
We are getting detailed questions from some investors regarding tier one. We will probably dedicate a couple of days in Japan to talking about that.
Iloniemi, Pohjola: We are in the Samurai market for diversification, that’s why we haven’t yet thought about Pro-Bonds. You get more diversification from a traditional Samurai than a Pro-Bond. You can also issue tier two under the Samurai programme or do private placements. Since we have an 18.1% CET1 ratio, I don’t think we are a candidate for tier one issuance.
: For those who have issued this year already, is there any reason to consider Pro-Bond?
Littorin, Nordea Bank: We are already an established Samurai issuer, and have done the documentation work. We will stick with Samurai and stay in that market. There is a difference in investor reach and we are aiming to gradually increase regional accounts, which in our opinion is best facilitated by Samurai. Also, we are an issuer in the Uridashi market, where you need the same shelf.
Charbonnel, BPCE: We made a choice, and our choice was to issue in the Samurai market. We do not plan on changing that. Yes, we do see that Pro-Bond is making some progress, but still it seems to us that the really deep market for non-Japanese issuers like us is the Samurai.
Amalou, SMBC Nikko: The appetite for Pro-Bonds is sometimes investor driven. You do have investors who have dedicated funds to invest in Pro-Bonds, and that creates a natural incentive for some issuers who haven’t yet established themselves in a specific format to look at that option. Also, there are different ways of approaching the Pro-Bond market. Some have ensured the documentation is similar to that of the Samurai, using domestic settlement for instance. In that respect they are sending a strategic message to the investor base. That approach helps minimise the loss of investors we sometimes talk about when we refer to Pro-Bond.
You couldn’t say Pro-Bond isn’t a legitimate format: it is. Even some established issuers in Samurai are looking at Pro-Bond to issue a different product within their range. It has developed very significantly over the last few years, with new examples such as Macquarie this year.
Haring, ING: When we were on a roadshow last March, we asked a couple of names: would you prefer Samurai or Pro-Bond? Some said we don’t care, some said they had a preference for Samurai but could also buy Pro-Bonds. My feeling is they have got used to the new flavour of the market.
Purton, Daiwa: These things do take time to bed down in a domestic market. Pro-Bond issuance is three years old, relatively young. It’s true a lot more investors are looking at it, and issuers get the obvious benefits in terms of disclosure, but they don’t get access to Uridashi and they don’t get the bonds included in the domestic indices. So there are pros and cons. It’s going to be a perfect fit for some and not others. But with global yen, Euroyen, Pro-Bonds and Samurai, everyone now has a choice. Five years ago it was: this is the format, like it and issue or don’t like it and don’t use the market. That has changed and that is a good development.
: You referred earlier to an issue that went from Pro-Bond to Samurai — Maybank presumably. That felt like warming up in one market before graduating to the other.
Purton, Daiwa: Graduation is too emotive a word. I can’t talk on behalf of any specific issuer, but let me instead make a general comment. If you are new to the yen market and are looking at a Samurai, it’s a lot of work and time to get the documentation in place: almost a leap of faith. You do all that, and then find out how much demand there is. We say, do your first deal, the name familiarity grows, the second deal is easier, and then regional placement grows too. But there is an alternative case for saying: start with a Pro-Bond, with simple English language disclosure, and once you have traction with the investor base, it may be time to discuss whether there are incremental advantages in moving to the larger investor base in the Samurai market.
Haring, ING: There’s also the maintenance aspect — not just the run-up to the shelf but the need to maintain a Samurai. When we have our results published, I see something like eight emails: four from Amsterdam to Tokyo and four back, and then we’re updated. So there is ongoing merit in our view in sticking with Pro-Bonds.
: Several issuers have talked about the growing importance of regional investors. Kaz, as someone based in Tokyo for the most prolific Samurai issuer, what do you see?
Tanaka, Rabobank: The regional investor base is very important to us because, as many have already mentioned, they are a pure diversification play: you could not access those investors issuing in other currencies. They are unique to the yen market. Up until last year we had seen continued growth in the regional shares of our issues, and it peaked at 50% in May 2014. This past May, the regional share went down because there were tremors in the market due to the Greek crisis and other negative headlines.
We have done five regional roadshows this year and are planning two or three more. To meet these people for the first time is a unique and very satisfying experience. They appreciate hearing our results and what we are planning to do.
: Do they have different expectations or appetite to the big Tokyo names?
Tanaka, Rabobank: Some of them prefer shorter maturities, because that is easier to get approval for. There are a lot of regional or Shinkin banks, and some of them prefer floating rate product, which is pleasing to see, as there are few floating rate buyers in Tokyo. The regional base can lead to you adding more tranches to a multitranche Samurai offering. It’s win-win.
Iloniemi, Pohjola: When we did our first deal in 2013, we had roughly 50 investors. In 2014, when we roadshowed in the regions, we had over a hundred.
Littorin, Nordea Bank: We have had some meetings with regional investors but haven’t had a dedicated investor trip to cover regional accounts. Our main investor activity on our annual Samurai roadshow is Tokyo-based. Regional accounts tend to be more active in shorter maturities.
Green, Lloyds: We are very similar. We have purposefully roadshowed to regional investors on the last two roadshows we have done. We had two teams on the ground, one seeing city accounts and one out in the regions. If you are willing to spend the time, it does reap very good results.
The nature of the meetings is slightly different: the level of interaction tends to be lower, but regional investors do appreciate one-on-one time and do support deals, so the work we’ve done is clearly having positive impacts on investor diversification.
Di Gregorio, Credit Suisse: We haven’t roadshowed in regional areas yet. Our experience in the Samurai market is relatively young, but with two transactions we have seen some of the smallest accounts coming in. It takes longer for them to have their credit lines approved, which is another reason the Samurai market probably makes it easier for them to make a positive investment decision compared to Pro-Bond.
: Dennis, is the regional investor theme relevant to the Pro-Bond market?
Haring, ING: I think it’s relevant. We have also seen an increase in the number of investors in that market. We focus our investor work in Tokyo, but maybe it’s good to consider going to, for instance, Osaka. It’s a capacity thing, but if you can free up the time, it is definitely worth doing.
: How about pricing, both in terms of relative to other markets, and the basis swap? What are we seeing?
Purton, Daiwa: Everyone around this table quite rightly gives Sam and myself a very hard time. People expect very fine pricing. Most people look at this market for investor diversification, but they are not going to do that unless the cost makes sense.
We are always fighting with the basis swap. Right now it’s about 20bp worse than at the beginning of the year; it has been particularly volatile and difficult since pre-summer.
In terms of pricing, you tend to have a floor of yen offer swaps flat. Some issues are coming at minus one, but there is at least the perception of a floor. Depending on where the basis swap is and secondaries are, and where that all translates back to a yen offer swap figure, that can be an issue on pricing viability. At present, on one side, you have the basis swap deteriorating, but on the other, secondary spreads in most markets are widening so that the comparable price as a yen swaps number is perhaps a little easier for investors to digest. So counter-intuitively you could say the market is a little bit easier than it was pre-summer from a pricing angle.
On the issuer side, there is the question of whether these higher secondary and primary spreads are temporary or permanent. Everybody looks at cost of funding: it’s great to have a granular investor base in Japan, but people won’t do it unless it makes sense from a cost perspective.
There’s also the question of new issue premia. Again, what we’re seeing in international markets right now is a recognition that issuers may need to consider paying a larger premium than they have in recent years. But regardless of that issue, and whether it is temporary or not, I think the yen market will remain price competitive, but the individual elements that make up the precise pricing discussion are going to change.
Amalou, SMBC Nikko: The basis swap cost is very hard to predict. You can control it to a degree nearer execution time, but what we try to do is be very transparent in terms of where pricing stands. We update our issuers on a regular enough basis to give them an exact notion of where yen prices relative to their benchmark or core market. But the key point, as you mention, is that once you’ve engaged with investors in Japan, you can almost secure a soft commitment to the bond spread levels that have been sounded. That protects you to a degree from the volatility you can see in the international markets at times, and particularly in recent months.
: Kaz, are all your proceeds swapped?
Tanaka, Rabobank: All swapped. The basis swap has matured a little bit since we first started issuing. When we started in 2008, the basis swap market was not as liquid, and we saw large moves immediately after a mandate was announced — and these things never go with you, always against you. Since then, and especially after 2010 when we saw much more frequent issuance in the Samurai market, a mandate announcement or rumours of a new issue being sounded do not affect basis swaps to the degree they did before. And I find the market is fairly liquid. When executing a transaction, from morning Tokyo hours to close of business London, I find I’m able to execute sizable swaps without too much trouble. But it’s diminishing returns: I can’t go too much bigger.
: What’s the ceiling?
Tanaka, Rabobank: The largest tranche I’ve ever seen in the market was in the order of ¥300bn, but that was for a sovereign entity that kept its funds in yen. With a little planning, to execute a ¥100bn swap is easier now than it was five years ago.
Di Gregorio, Credit Suisse: We have a certain need for yen within our global operations, but it varies. We’ve got flexibility: sometimes we swap, sometimes we don’t. We are a US dollar currency bank, and therefore the basis swap is relevant in our decisions whether we swap or not.
FX is not going to be the driver in our decision to go or not to go, but it will be a consideration.
Last year, for example, we started working in October and by the time we could issue in December, the basis swap had moved against us by about 15bp-20bp. When we came to market in July, we actually priced inside our core curves. Overall, on balance, it’s worth having some flexibility.
Iloniemi, Pohjola: We swap everything to euros, so obviously the swap is important to us. Last year we had the experience of pricing a five year euro deal and a Samurai on the same day — and we got the same pricing, to within a basis point.
Littorin, Nordea Bank: We also swap everything back into our currencies. Generally, 2015 has been a good year in terms of relative value for Samurai versus other markets. Referencing the fair value in other markets is a normal step in the pricing process in the Samurai market. However, we have been challenged this year by local hurdles expressed by some investors, be that spread to JGB or YSO flat, that cannot be penetrated. That is a new element that has entered into the price discovery process, and it risks distorting the relative value discussion when such hurdles become the binding constraint. This is an issue that is likely to be more relevant for higher rated borrowers which operate with tighter spread margins. In our May transaction it ended well — we could price our transaction in line with other markets — but it may not be possible in other circumstances.
Charbonnel, BPCE: There is not a huge arbitrage on cost, because Japanese investors are obviously looking at other markets — they look at our secondary levels in our euro and our dollar bonds. But since they are looking for yield in yen, it turns out that usually prices are reasonably competitive vis-à-vis our prices in the euro or US dollar market.
On the swap, recently we have kept our yen. When there was a fixed rate tranche we swapped to floating rate, but apart from that we have not done any cross-currency swaps.
Green, Lloyds: We are very sensitive to cost. When we got our 2014 trade away, a key consideration was cost. The discussions on
the trade had extended over around a 12 month period, with cost the main reason we didn’t immediately launch a trade.
There is a leap of faith insomuch as you start the process, hope the market will be where you want it to be, and when you get to the execution window you’ve always got a choice as to whether to press ahead or not. We have chosen not to do three year trades when it comes to Samurai, because on a relative basis it made less sense than five years, when compared to other currency issuance.
On balance, sometimes the trade will work at a better price than you can achieve in euros or dollars, and sometimes worse. Also, the market stays open longer than some others, and has less volatility. So price is clearly a consideration but you have to be pragmatic in your approach.
Haring, ING: We look at relative value, but the decision whether we swap or not is relevant. If we have made a decision prior to issuing that we will not swap to dollars, we will still look at relative value, but it will be less relevant than if we do swap to dollars. This time, we didn’t swap.
: What does the experience of this year say about the differentiation of yen markets for funding?
Charbonnel, BPCE: It is probably a little more separate than other markets are. If there is some trouble in Europe, it’s unlikely that the US market would be unaffected. With the Japanese market, I’m not saying that it’s unaffected, but there was one issue in the market right after us — Credit Suisse — and they managed to do a very successful transaction.
As far as we were concerned, Japanese investors were reassured that we had pretty much no exposure to Greece of any kind, not only sovereign but any kind of exposure at all. The fact that we are pretty retail oriented is also reassuring for them. I’m not saying they would have bought any bonds during that period of time, but as far as BPCE was concerned they did not have a problem.
: What is the key to successful investor relations in Japan?
Tanaka, Rabobank: Doing regular roadshows on at least an annual basis is crucial, keeping people updated of any changes within your organisation or funding plans. We all complain about the long lead times required in the market, but keeping them up to date allows for a shorter turnaround on investment decisions. Although most people recommend one week to a pricing window, you can shorten that by a day or two if you have a good following.
Tellefsen, DNB Bank: It is important for us to be in Japan once a year. The story we tell is exactly the same as we tell in all other markets. We have a slight language barrier sometimes in Japan, so sometimes you need an interpreter and do presentations more slowly, but the story is the same. It’s important to be there once a year and remind them about you, keeping them up to speed with what is happening.
Iloniemi, Pohjola: There is no mystery to Japanese investors. They are investors like anyone else. They don’t want surprises, ever. You tell them the story as it is, communicate well and it’s similar to other places.
Littorin, Nordea Bank: Roadshowing is almost more important in Japan than elsewhere. To physically be in front of an investor is an important step in the relationship building between the parties. We make sure we have relatively senior management there to demonstrate the importance of the relationship.
You face the same questions in Japan as in other markets. When you go into the room you face well prepared investors with a list of 10-20 questions. It’s no different in terms of dialogue from other markets.
Di Gregorio, Credit Suisse: We have a strategy of regularly updating investors in all the markets we are present in, even if we do not have specific issuance plans. We were in Japan in May last year before even thinking about a Samurai, then went back again in November given we had a transaction in mind. Japanese debt investors are generally keen to cover the same topics we typically discuss with investors globally, such as developments around the bank’s strategy, results, credit ratings, capital, liquidity and funding plans.
We had in the past experienced big group meetings, but we think one-on-one meetings tend to be more effective and can lead to a slightly more active Q&A session. Beyond roadshows, the main difference is the longer marketing period — you need to be there with the books open for three to four days, which you wouldn’t do in any other market — but that’s just a local protocol.
Green, Lloyds: We try to be out in Japan at least once a year with general credit updates. We’ve got a colleague based in Singapore as a primary contact for the Asian investor base. I would categorise my experience of meetings as good but the format does tend to be reasonably formal; the hardest meetings to do are the ones where you are just page-turning, but that’s what some investors want. There are other meetings where they become a three-hour marathon. But generally, the tone of meetings is the same as we see elsewhere.
Purton, Daiwa: Face to face dialogue is crucial. We are of course aware of the huge investment in time that is required from the issuers, and the physically long distances to get out there. We touched earlier on the value of regional roadshows, and these add significantly to the distances travelled and the logistical commitments made.
Going back 20-30 years, there would be no questions at the end of investor meetings. Now, you frequently run out of time to answer all questions. There is a much more intense dialogue. Those one on one meetings are absolutely crucial as you build up name familiarity and brand loyalty.
Amalou, SMBC Nikko: The annual update exercise that most of the issuers around the table are conducting is exactly what the investors appreciate. I would add that most investors met are buy and hold, so you are often facing existing holders, and in many cases you sense that from the types of questions that come to you.
: What’s the value of a local rating?
Purton, Daiwa: Traditionally there has been discussion on the value of having a local rating, and for years the view has been that for your classic Tokyo-based accounts it’s not really adding much value. There’s always been a suggestion that as you percolate down through the regions, some of the smaller accounts might value a local rating as they will be more familiar with that agency. People always ask how that is going to translate into basis points and cost savings, but it’s very difficult to calculate the advantage.
Tanaka, Rabobank: We mentioned translation earlier and that is the key point. For some of these smaller investors that are not English speakers, having a third party Japanese language report on an issuer makes it easier for them, and a Japanese rating would facilitate that.
Purton, Daiwa: When credits look at the sub-debt option, the value of a Japanese rating becomes more pertinent, simply because it may gain you access to the index. There is a requirement for an A- rating from accredited agencies, and the two Japanese agencies are approved. It will become more relevant to issuers as they look at sub debt.
There’s a clear difference from the Western agencies in terms of how they differentiate between senior and sub; some of them have a difference of up to three notches, and for others it’s one.
: Roland, BPCE took a rating. What was your experience?
Charbonnel, BPCE: We got a rating by R&I in June, just before our latest senior Samurai bond issue, but the real purpose of that rating was for potential tier two bond issues going forward. The thinking is twofold. First of all it’s easier if there is literature in Japanese for investors to read, particularly for investors in the regions of Japan rather than in Tokyo: they can have more confidence in what they are buying if they are able to see that this paper is rated by a Japanese rating agency.
The other thing is to be eligible for the Nomura BPI index, which is quite important for tier two if you want to be able to reach asset managers and trust banks.
: What was the process of getting rated like?
Charbonnel, BPCE: It was fine actually. Nothing so different from what we experience with traditional, non-Japanese rating agencies.
: Kaz, you didn’t need one for your sub-debt deal?
Tanaka,Rabobank: We are fortunate enough that even with a sub transaction, our bonds were index eligible, as we are single-A.
: Finally, what impact does Abenomics have on you all?
Tanaka, Rabobank: The Samurai market is as active as it is because of Abenomics. The Bank of Japan is buying the majority of JGBs, therefore limiting the amount of Japanese bonds available to Japanese investors. And that, plus the scarce supply of domestic issuance from agencies or Japanese corporates, has led some investors to tell me they are only looking at the Samurai market right now, as the only reliable source of supply. All of us have benefited.
Tellefsen, DNB Bank: With an extreme low interest environment, some investors are more or less forced to increase their risk appetite. This is why we are now seeing questions about our tier one transactions in Japan. But that is not specific to Japan: it is true in most other markets as well. Norway is one of the few countries in the world that still has an interest rate from the central bank — 1%.
Purton, Daiwa: Bank of Japan is taking 70%-75% of JGB issuance so a lot of domestic investors are crowded out from their core market. They are looking at alternative domestic product and the one that offers them the yield tends to be Samurai. We are seeing more domestic money looking at Samurai than we have for a long time.
Amalou, SMBC Nikko: In the US people are increasingly talking about an end to the easing cycle. We are not in that predicament in Japan. We anticipate rates to maintain the very low levels we have for the foreseeable future.
We had a revised negative Q2 GDP released recently; inflation, which seemed to be picking up, is back to a more neutral position; and domestic consumption is still weak. So in that context, I think QE and loose monetary policy will continue. s