Copying and distributing are prohibited without permission of the publisher.

Watermark

Europe’s banks break new ground in Japan

Japan Tokyo night 230px
By Tyler Davies
27 Sep 2016

At the beginning of 2016, the Bank of Japan (BoJ) followed Europe’s central bank and took a dive into the world of negative interest rates. Bond yields have since tumbled and investors and regular borrowers in Japan’s domestic market have been forced to adapt to the new, alien environment. Though Samurai issuance volumes are down in the first half of the year, the world’s second largest bond market is evolving quickly and has proven itself to be both flexible and dynamic. GlobalCapital spoke to seven prominent international yen issuers and two banks about their experiences in the Samurai market this year.

jp 18

Participants in the roundtable were:

Sam Amalou, managing director, head of debt capital
markets, SMBC Nikko, London

Roland Charbonnel, director, group funding and investor relations, Groupe BPCE, Paris.

Peter Green, senior manager, public senior funding and
covered bonds, Lloyds Banking Group, London

Dennis Haring, vice-president, long term funding, bank
treasury, ING, Amsterdam

Lauri Iloniemi, senior vice-president, head of group funding and investor relations, OP Financial Group, Helsinki

Ola Littorin, first vice-president, head of long term funding, Nordea Bank, Stockholm

Vince Purton, managing director, head of debt capital
markets, Daiwa Capital Markets Europe, London

Richard Staff, capital management, Standard Chartered, London

Kazuhide Tanaka, head of long term funding for Japan, Rabobank, Tokyo

Tyler Davies, moderator, GlobalCapital


globcap

: It has been an interesting year for the Japanese domestic market, even if at times it has been difficult for European borrowers to raise funding in yen. Sam and Vince, how do you think the Samurai market is shaping up for the remainder of the year?

Sam Amalou, SMBC Nikko: We expect there will be more supply in the second half of the year. In recent times, the vast majority of supply in the yen market has tended to come from mainly financial institutions and concentrated around May and June. This year that percentage has fallen sharply because of some notable absences during a more uncertain backdrop in June, due to the UK’s EU membership referendum, a negative basis move, investor adjustment to lower rates and Targeted Longer-Term Refinancing Operations (TLTRO) introduction. 

But the yen market is very diverse. You get issuance from financial institutions, corporates from emerging markets and some of it comes in Samurai and some in Pro-Bond format. Already volume has picked up post-summer, but how active it will be remains dependent on the underlying dynamics.

Vince Purton, Daiwa Capital Markets Europe: The Samurai market, like the dollar market, has gone through a period of volatility. In recent years we have seen issuance volumes reaching or even exceeding ¥2tr ($19.6bn), but in the last 12 months the figure has been closer to ¥1.5tr.

Negative interest rates and unfavourable yen swaps have had an impact on those numbers, but I think part of the decline has been down to the emergence of the Pro-Bond alternative. The volume of Pro-Bond issuance over the last 12 months was over ¥300bn, and if you add that to the volume of Samurai supply you are up to about ¥1.8tr, which is a good number historically.

There has also been a healthy emphasis on variety this year. Canadian issuers have returned to the Samurai market and debuted in the Pro-Bond market, US and Spanish banks have explored the Pro-Bond format and unprecedented numbers of Latin American borrowers have been active in yen. Although FIG names continue to dominate, we have seen a good pick-up in public sector supply.

September through December I think we will see good absolute volumes versus the same period last year, and crucially there may be less focus on classic senior than in the past as financials make growing use of tier two and holding company senior formats. 

The market is adapting to the new paradigm of negative rates and throwing up a greater variety of options for financial issuers than in the past. That has to be healthy.

globcap

: Let me turn to issuers now. Bearing in mind that the Samurai market has been quieter than usual in the first half of 2016, how important is it to remain in contact with Japanese investors?

Ola Littorin, Nordea: A regular dialogue with our investors in Japan, as well as in other strategic markets, remains a priority for us. This is illustrated by an expansive non-deal roadshow each spring complemented with one-on-one meetings and calls with key individual investors over the year. A pro active dialogue ensures that investors can stay on top of news from the Nordic economies as well as with developments directly related to our credit.

Roland Charbonnel, BPCE: It is extremely important to us too. Even if we had not planned a Samurai bond issue at the end the first half of 2016, we would have maintained our marketing effort because we know Japanese investors, especially if they already hold our paper, are extremely used to seeing us on a regular basis, to have a presentation of our latest earnings reports and to have a question and answer session. 

But we actually did more than roadshows to remain in contact. We did a senior unsecured Samurai bond issue with five, seven and 10 year tenors at the beginning of June and we were extremely proud to welcome the first investment ever in the 10 year tenor of a very large city bank.

Peter Green, Lloyds: Investor and market diversification remains an important consideration through the cycle, so maintaining contact with Japanese investors when the market is quiet is important. We engage in investor relations activity globally, including Japan, in order to maintain dialogue with this core investor base. Japanese investors also have diversified products — private placements in various currencies — in order to adapt to the challenging rate backdrop in their home market.

Overall funding needs for European banks remain low, given the provision of liquidity from central banks. In a normal funding year, we’d anticipate being a visitor to the yen market at least once a year.

Lauri Iloniemi, OP Financial Group: We have about ¥120bn of outstanding bonds, so it is very important to meet the investors who have put their trust in our bonds and update them on what is going on within our group. But we issued a Samurai bond in November 2015 so it has not been too long since we last visited the market. 

globcap

: Are we likely to see you issue in 2016?

jp 8.2

Iloniemi, OP Financial Group: We normally expect to issue at least once a year. It might well be that we do not issue at all this year, if market conditions do not become more favourable over the remaining months. 

For us, the yen market is very useful as an additional funding channel, but it is not my ‘home’ market so to speak. That means I can plan to issue in yen when it suits, rather than as a strict requirement. Of course, we do nonetheless want to show our commitment to Samurai bonds, by roadshowing on a yearly basis and, whenever it is possible, issuing on a yearly basis.

globcap

: Kazuhide and Ola, Rabobank and Nordea both often issue benchmark Samurai deals in May. What made you think twice this year?

Kazuhide Tanaka, Rabobank: A major contributory factor was the Bank of Japan’s negative interest rate policy, and on top of that, the cross-currency basis swap — because we swap our proceeds from Samurai issues to either dollars or euros. 

Both sides have worked against us. The BoJ’s monetary policy meant absolute rates became negative earlier this year. Interbank swaps were negative out to seven or eight years at one point, while Japanese government bonds were negative out to 12‑15 years.

Investors essentially drew a line in the sand and said they required a minimum absolute coupon rate for Samurai issues. It became expensive to obtain those kinds of targets, as far as we were concerned, and a lot of better rated issuers were in the same situation in the first half of 2016. Though we had the capacity to issue, market conditions here were very challenging and so unfortunately we were not able to come to market.

Littorin, Nordea: Our issuance pattern in the Samurai market has been stable and has incorporated a transaction on an annual basis in the second quarter. We explored a similar strategy also this year but the relative value argument worked in favour of other markets. 

This was particularly the case in the critical five year segment of the curve, which we at the time viewed as too expensive. The fact that we opted to not launch a transaction in the spring of this year does not represent a changed view of the strategic value of the Japanese market. The Samurai market remains one of our strategic markets and we will continue to have a regular presence.

globcap

: Richard, Standard Chartered raised ¥45bn of five year senior funding this September. Why did you think it was a good time to come to the market?

Richard Staff, Standard Chartered: A combination of factors pushed us into this September window. We did our first Samurai bond last year and we had been fully expecting to issue again since we filed our shelf this May. We might have launched closer to that time, but the result of the UK’s referendum [on EU membership] meant June did not work out as anyone had planned.

I think the deal worked from a timing perspective. After a constructive summer we took the opportunity to put ourselves back into the yen market, before the second half of the Japanese year and before we go into earnings blackout in October. Pricing was broadly comparable across all major currencies, though dollars was always going to be a little tighter. 

The goal of having a Samurai programme is to have a useful level of diversification, so that you are not beholden to any one investor base. We were pleased to attract a lot of repeat investors from those that had bought our debut issue last year. Some life insurance accounts would have preferred a longer tenor, but the five year maturity appealed because having done five years, 10 years and three years in dollars, rotating back to five years made sense. We do not have a particularly long tenor balance sheet as a group, so we like to balance out our 10 year debt with threes and fives.

globcap

: Kazuhide mentioned BoJ’s negative interest rate policy earlier. How do other issuers find negative rates have affected the Samurai market this year?

Charbonnel, BPCE: It is true that the negative interest rate policy of BoJ had a major impact on the Samurai market. The most significant impact was the change in the pricing method, which switched to a coupon basis instead of spread versus the Japanese yen swap offer rate. 

For some issuers, that meant that the cost of funding after swap into their domestic currency became uncompetitive. Fortunately, it was not the case for us as far as the longer tenors we chose were concerned. And that was part of the explanation why we decided not to offer shorter tenors.

Iloniemi, OP Financial Group: There is certainly a learning curve for investors in adapting to the new environment, and sometimes this has been a slower process than you might expect. As a yen issuer you may be faced with either postponing your plans to issue, or increasing the maturity of your issuance in order to offer investors a positive coupon.

But monetary policy has also affected markets on global scale. Though the BoJ’s negative interest rate policy may have made it less attractive to fund in yen this year, OP’s spreads have been compressing in the euro market at the same time, which has also been function of central bank policy. 

There is no strong incentive to look at an alternative market when you can generate such attractive funding levels in your domestic market. 

globcap

: So the basis swap is particularly important when considering timing?

Iloniemi, OP Financial Group: I am looking for yen funding levels that are equivalent to my euro funding levels, so the basis swap has to work before I consider issuing in the Japanese market. There are many other considerations of course, but the basis swap is an important one. 

These dynamics have improved a little in recent weeks, but just as we are seeing yen swaps getting better for issuers like us, at the same time we are also seeing euro funding levels getting tighter. So what you gain in one hand, you lose from the other. It is never easy in that sense, because both of these variables should be aligned before you issue.

globcap

: Can you give me an example?

Iloniemi, OP Financial Group: In 2014 we did a yen deal and a euro deal on the very same day, and both were five year fixed rate senior bonds. Having swapped the yen bonds back to euros, we saw that the two levels were within 0.25bp of each other. That might be one of the only cases where you can directly compare pricing between the two markets, but it shows how conditions must align before I would consider issuing a Samurai bond.

My main driver for the Samurai market is diversification rather than any arbitrage play, but I cannot justify to my management paying more for yen funding than I could pay for euro funding. They should be at roughly the same level.

globcap

: Have other issuers had similar experiences? How have pricing dynamics impacted your decisions this year?

Green, Lloyds: Yes, basis swaps and the cost of issuance remain of great importance to us in our funding planning. However, given the lead time that is required in documenting a Samurai trade, there are always risks that pricing dynamics move adversely before execution. Swap rates have clearly been more of a challenge for investors than bank issuers, who are more focussed on the landed cost of funding once cross-currency swaps are taken into account.

Tanaka, Rabobank: A major feature of the primary market, during the first half of 2016, was that bonds were marketed on the basis of absolute coupon rates, because a few investors were dictating that they could not accept anything below a certain coupon — usually 20bp or so. 

But market conditions have changed a little recently, and interest rates have risen a little in Japan over the past month. As those rates have risen we have come into a more normal environment, where bonds are marketed on the basis of a spread over swaps, as they were previously. That makes things more manageable from an issuer’s perspective, because Rabobank and other issuers swap the proceeds of Samurai issues into an amount based on a swap spread. It makes it simpler to see what our all-in cost is during the marketing process.

jp 8.3

Staff, Standard Chartered: Investors were very resistant to going through 0.5% earlier in the year, and that became a bit of a barrier for us. The lower rates go, the more challenging some of the numbers become. Last year people were very much talking about spreads when we issued, but now absolute coupons have become much more important. 

If we were looking to do significant volumes of funding in yen then that switch might get more of a focus. But we look at what that coupon might mean on a dollar Libor basis, as well as relative to our other funding options. We want to be a regular issuer in yen and, as long as it stacks up relative to other currencies, a coupon approach to pricing does not particularly concern us.

Littorin, Nordea: From our perspective, the negative interest rate policy impacted issuers more than investors in the yen bond markets. While Japanese interest rates have significantly fallen since the announcement of the policy, investors have still been able to command positive yields on new issues, meaning that credit spreads have widened. 

In addition, given the persistence of unfavourable conditions in the cross-currency basis swap market and the tightening trend of credit spreads globally, on a relative value basis, the Japanese yen market has been relatively more expensive during 2016, especially for highly rated borrowers.

In terms of impact on investor behaviour, we note some willingness to assume greater risk among investors in order to preserve returns. This has manifested itself in extensions of maturity profiles and moves down the credit curve or capital structure. Where this change in risk profile has impacted cross-border issuers most profoundly is in terms of the increased appetite for non-Japanese assets.

globcap

: So the sorts of products on offer have changed since the BoJ adopted negative rates?

jp 8.4

Tanaka, Rabobank: Because interest rates have been so negative there has been a shift in the tenors banks have issued. In previous years the major sweet spot was the five year tenor, and a lot of investors felt that five years was the maximum maturity they could take in terms of credit risk for a Samurai bond. For the majority of issuers too, the five year tenor is perhaps the most agreeable maturity in terms of their asset and liability mixes.

But this year we saw a shift towards the seven year maturity for the few issuers that did access the market in May and June. That has really been the only way to make sure investors could obtain their coupon targets. While I think much longer dated bonds may be priced this year, depending on the environment at the time, I believe the market will shift back towards the five year tenor if conditions allow for it.

Staff, Standard Chartered: We did not want to go any longer when we issued our five year senior bond this September, but a decent chunk of investor demand remains focused towards those longer maturities. Last year, for example, we managed to print one of the largest 10 year senior bonds people had seen in the Samurai market.

In the next six months or so I think seven years is possibly the most desirable tenor from a local investor’s point of view. For as long as rates remain negative Japanese accounts will want to look at longer maturities, as I think nobody really wants to invest in three year debt at the moment.

Purton, Daiwa Capital Markets Europe: Samurai issuers have so far priced 57 tranches across 21 new issues in the last 12 months, with more to come before this month is over. Of those transactions the most popular maturity is five years, but the second most popular is now 10 years and average tenors have increased. So there has been a move along the maturity curve, as issuers attract investors with positive yields in the increasingly negative interest rate environment.

For the same reason, there has also been a continued move along the credit rating spectrum with a greater variety of credits now being enthusiastically welcomed and with Total Loss Absorbing Capacity (TLAC) and tier two formats becoming established options alongside classic senior debt. Plus let’s not forget the re-emergence of strong support for public sector names. The bottom line is the search for yield means an acceptance of more risk by investors and that means more product and issuer variety.

globcap

: Do you expect to see 15 year or 20 year Samurai bonds in the near future?

Green, Lloyds: It is possible, but there may be limited appetite for banks to issue in these tenors unless it comes at a very attractive cost of funding.

jp 8.5

Littorin, Nordea: Looking back at the last Japanese fiscal year the sweet spot for most Japanese investors was certainly five years. As mentioned, this fiscal year we have seen a trend of the sweet spot moving to seven years. We have also seen United Mexican States issuing a 20 year as one of their four tranches. 

While the trend could remain sustainable under an ultra-low yield environment in Japan, it is difficult for us to imagine those maturities becoming the core maturities, given the significant representation of banks within the core investor base, as well as the sensitivity to mark-to-market volatility among a buy-and-hold investor community.

Charbonnel, BPCE: I agree. The appetite for yield of Japanese investors could be the rationale for very long tenors, but at the same time Japanese investors tend to be fairly conservative, so I am not sure it will represent a sizeable proportion of the overall Samurai market.

globcap

: With investors searching desperately for better returns, have better rated issuers found it challenging to access the market for the type of funding they want?

Tanaka, Rabobank: Perhaps, but I think it is a very temporary phenomenon. Interest rates went extremely negative during the first half of the year, but I would hope that we are on the cusp of a more normal issuing environment now. If that is the case, it would make funding conditions more attractive for us, as well as for other well rated borrowers.

Iloniemi, OP Financial Group: It is worth noting another issue that impacted the Samurai market earlier in the year and that was the European Central Bank’s (ECB) reintroduction of TLTROs, which supply banks with cheap, four year funding. Though it is a bank-specific issue, if more lenders are using the TLTRO facility they simply will not need to finance as much in the capital markets.

globcap

: How has the yen investor base changed over the past year?

Staff, Standard Chartered: Japanese investors are now more sensitive to where secondary dollar and euro curves sit. The local investor base has started looking more closely at what happens to secondary spreads when a new issuer circulates the initial marketing range and, more importantly, what level of volatility those bonds have gone through during the course of the year. 

Yen bonds tend not to be marked-to-market very much, so investors feel volatility in international spreads. That is something that is much more obvious now than it was a year or two ago. 

Japanese investors have always probably been more naturally conservative than buyers in the dollar or euro markets. They do a lot of their credit work in advance, which I think is why they may be a bit more shocked if an entire market away from them shows complete dislocation. But our experience is that, once they are familiar with you, they regularly support your new issues. 

Charbonnel, BPCE: In the senior unsecured space, we have seen recently an increase in the proportion of regional investors in our Samurai bond issues. It went up from 17% for our combined December 2014 and July 2015 Samurai bond issues to 33% for our combined December 2015 and June 2016 Samurai bond issues.

In the tier two space, the proportion of regional investors in our Samurai bond issues has remained quite high although it has decreased slightly between the first one in January 2015 (78%) and the second one in December 2015 (59%).

Our roadshows now almost always include meetings with regional investors in addition to meetings with central investors. This recognises the importance of regional investors and this demonstrates our will to maintain and possibly increase the participation of regional investors, especially in our senior Samurai bond issues. Central investors obviously remain key investors, but it is quite positive to increase granularity through the participation of regional investors.

Tanaka, Rabobank: The best mix we saw was a 50/50 split between regional and centrally based major institutional investors. But in most cases there is normally a 60/40 division in favour of institutional investors and at times the split is even 70/30, as large investors try to dominate tickets. I am not convinced these dynamics have really changed this year.

But this question is actually also linked to discussions about TLAC senior bonds, which have been a developing issue for UK issuers in the Samurai market this year. The Financial Services Agency (FSA) has not yet determined a definitive credit risk weighting for TLAC-eligible senior bonds, and so they have suffered a little in Japan. Preliminary discussions have indicated it could be set at 250% — the same as it is for tier two transactions. For a lot of regional institutions a risk weighting that high would be hard to swallow. 

I understand that a UK bank’s recent five year senior bond therefore had a very weak regional following. I would imagine other UK banks that issue senior debt from their holding companies would also find demand dominated by large, centrally based institutional investors. Asset managers or life insurance companies, for example, for whom bond risk weightings are not as critical as they are for regional banks, credit unions or credit co-operatives.

As far as Rabobank is concerned, we are not in a position to issue too much at the moment because the Dutch regulatory authorities have not yet taken a stance on TLAC. At this point in time our focus is on issuing senior or tier two transactions.

globcap

: Is the situation clearer for tier two?

Tanaka, Rabobank: We sold the first Samurai tier two issue last year, and it had a clear risk weighting of 250%. But demand for the bonds was dominated by centrally based institutional investors, and since then other issuers have had similar experiences with tier two transactions. Frankly, I believe regional institutional investors still have a hard time accepting a 250% risk weighting for an asset.

I do roadshows meeting with regional investors where I discuss these sorts of topics. Earlier this year they were certainly in a real quandary. Interest rates were so negative they did not know what to invest in. They have to put their money to work somewhere, and buying financial assets is often the only option for a lot of these people. At the same time, a 250% risk weighting is unacceptable for many regional investors. They will have been breathing a slight sigh of relief as rates rose across the past month, but we will have to wait and see how the situation develops in the remainder of the year.

globcap

: Richard, Standard Chartered recently raised ¥45bn in senior funding from its holding company. How would you say the Japanese investor base has reacted to the format?

Staff, Standard Chartered: We have a good following among the largest yen accounts, which have no problems buying debt issued at a holding company level. Attracting other yen investors to the format is a work in progress. We have never done a regional roadshow in Japan, so the next step is to meet with some of those accounts either through the issuer or through some of the local banks.

Last year we did a very large debut yen transaction from our holding company, and we saw that some Japanese investors were concerned about what risk weighting they might have to hold TLAC bonds under. If you are looking to huge equivalent volumes of funding in yen then that will be a real challenge. But if yen is going to be the second or third currency you issue in, the Samurai market will prove a very useful addition to your range of funding options. 

Shinkin banks and regional investors did also form a fairly large section of the book on our latest trade. That was very encouraging. In the long run, UK and Swiss borrowers will have to work with local investors, investment banks and the regulator to make sure holding company issuers are not disadvantaged in the market. 

globcap

: Do you think the Samurai market will become more important for issuers looking to broaden their investor base for loss-absorbing debt, like tier two and senior holdco bonds? 

Staff, Standard Chartered: We started thinking about a Samurai programme knowing we only issue from our holding company. We had a very good reception for our debt issue last year and we hope to continue to get a good reception in the asset class.

Issuers want to have more and more avenues from which to source their investors. The yen market is the second biggest bond market in the world after the US, so if we can attract the right investors then it makes an awful lot of sense for us to try and find a home for loss absorbing bonds there. But that phenomenon is not necessarily limited to the Japanese market. More generally, issuers are looking to broaden their investor bases wherever they can.

Littorin, Nordea: We expect the interest from Samurai issuers in sourcing capital funding in Japan to continue, primarily driven by relative value and diversification from other more traditional markets for capital issuance. 

The challenges to overcome would include a relatively narrow investor base so far which leads to potentially modest ticket sizes, at least in comparison to more established markets. As more investors explore possibilities to gain better returns by going down the capital structure, at least for well known issuers, we would expect that the investor base would broaden and deepen over time. If so, the Samurai market would represent even more value for high quality issuers.

jp 8.6

Green, Lloyds: We would also expect to see a continued trend for issuers to target the Samurai market for diversification purposes in strategic trades.

Our experience has been that investors have been more active in higher yielding product. Holdco product and tier two notes have been more popular, with the higher yields on offer attractive to Japanese investors.

Iloniemi, OP Financial Group: We would not rule out issuing tier two this year, if the market is right for it. But we still need more clarity on upcoming regulation, like how TLAC rules and Minimum Requirements for Own Funds and Eligible Liabilities (MREL) are going to be combined. We expect to know more on this front by the end of the year. 

We continue to monitor market dynamics across products available to us, especially in holdco products as we continue to transition to MREL requirements.

Purton, Daiwa Capital Markets Europe: As with any new product, TLAC senior bonds will take time to bed in, but the prospects are strong and positive. The first tier two issues took a little bit of time to develop momentum as well, but we are now seeing more and more investors looking at buying these.

There is some investor education still required, given we have only seen a few trades so far. But the more deals that surface in the yen market, the more investors will embrace the format. And the crucial debate is on how these bonds will be risk weighted domestically in Japan, but I believe that we should see much needed clarity on that front pretty quickly. 

TLAC bonds will clearly be a debt class that will grow in terms of its overall representation in total yen issuance volumes, both Samurai and Pro-Bond. Some issuers will gravitate to Pro-Bond format for TLAC debt, others will use the tried and tested Samurai route, and both formats will be equally supportive.

We are facing historically low rates, and investors are desperately searching for yield in the domestic market. Samurai bonds can still offer more yield than the equivalent domestic alternatives, and hence will attract more overall appetite than in the past — and investors know that they will need to take on more risk in return for that yield advantage. TLAC debt is in many ways the perfect balance of yield and risk.

jp 8.7

Charbonnel, BPCE: Yes, I believe that there should be a strong interest from Japanese investors in TLAC eligible debt. This could be the case in particular for investors buying senior bonds but not able to buy tier two subordinated bonds. 

As far as French banking issuers are concerned, such TLAC eligible debt will have a senior status — a senior non-preferred status to be precise — when the new legislation currently being discussed by the French parliament is passed. This new class of debt will be junior to senior preferred, or old style senior, but senior to tier two subordinated debt. Obviously it will offer a higher spread than senior preferred.

globcap

: Roland, BPCE became the first non-Japanese issuer to complete a tier two issuance on the retail Samurai market this year. Can you talk about why you launched this trade and why you decided against doing an Uridashi bond in its place?

Charbonnel, BPCE: Thanks to a great partnership with SMBC Nikko, BPCE was indeed very proud to be the first non-Japanese issuer to have successfully completed a tier two issuance in the retail Samurai market. It was for us a great way to further diversify our investor base, especially in the tier two space. 

It came just a little less than a year and a half after we became the second non-Japanese issuer to complete a tier two issuance in the institutional Samurai market. This increases further our presence in the Japanese financial market, which is one of our two key diversification markets and it is obviously very positive to be viewed by market players as a pioneer in this market. 

We considered both Samurai and Uridashi bonds, but ultimately we followed the advice of SMBC Nikko and chose the Samurai format. There were two main reasons. Firstly, the Samurai format seemed to offer even more protection to Japanese retail investors than the Uridashi format, and the involvement in a retail Samurai transaction of a Commissioned Company for Bondholders (CCB), representing bondholders, was part of this additional protection. Secondly, retail tier two bonds issued by Japanese banks were done as public issues, similar to a Samurai format.

globcap

: Dennis, ING has chosen to print Pro-Bonds instead of issuing in the traditional Samurai market. Could you explain why you decided to take this path?

jp 8.8

Haring, ING: We feel that the Pro-Bond market is a good alternative to Samurai, as the disclosure requirements are lighter, the execution timelines are shorter and the number of issuance windows is bigger. 

The Pro-Bond is a good route for issuers who think the disclosure efforts for Samurai are too cumbersome, but who would still like to diversify into the local yen market. For Japanese investors, this means that more names will reach out to them, so the diversification works both ways. 

globcap

: What do others think about the advantages or disadvantages of the Pro-Bond market?

Green, Lloyds: Given we have a Samurai shelf, we feel that we have the ‘gold standard’ access point to the domestic Japanese market. We do not give much consideration at all to the merits or demerits of Pro-Bonds. While the disclosure for Samurai can be time consuming, it does give us access to a broader range of investors.

Staff, Standard Chartered: When we first started working on the shelf registration three years ago, the Pro-Bond market was still relatively nascent. At the time, we were advised against establishing ourselves in the Pro-Bond market, because it was a new process that may have taken five or even 10 years to become well established. 

Now more and more issuers are doing Pro-Bonds and it is interesting to note that the US banks will no longer issue Samurai bonds from their holding companies, in order to meet their TLAC requirements. That could encourage even more banks to go down the same route. But we wanted to demonstrate right away that we were there to stay in yen, and we thought the Samurai format would be the best way to do that. Having established ourselves in the market, there is simply no reason to switch to Pro-Bonds now.

Littorin, Nordea: We acknowledge activities in the Pro-Bond market have gradually picked up over the past few years. However, we retain the view that the Samurai format provides us with the widest reach across the Japanese investor base and is still the most favoured format by investors. Having gone through the work of establishing the documentation the maintenance work is worth the commercial value in terms of issuance.

Iloniemi, OP Financial Group: We have been pretty happy with the decision to go for Samurai, and the main reason for that is diversification. I am looking for investors that could or would not buy my bonds in other formats, like Japanese regional accounts. 

A lot of my investors are based outside of Tokyo. For example when we last issued in November 2015, regional investors accounted for more than half the number of orders in our book — though of course the volume of demand regional accounts was smaller than it was from central institutional buyers. 

The regional investors represent the true value of diversification, because we would not be able to reach them in any format other than Samurai. If I were only doing Pro-Bonds I would certainly miss some of those accounts, not least because many of them require documentation to be written in Japanese rather than English.

globcap

: What work do you do to attract the regional investors?

Iloniemi, OP Financial Group: When we roadshow we spend part of the time in Tokyo and another part of the time in the different Japanese regions.

We are fortunate because many regional investors have a good understanding of our organisational structure. Usually if you are a co-operative bank like we are, you have to explain your structure at length to investors. This is often the case when I roadshow in Europe, for example. But in Japan it is already pretty well understood, because a number of the banks there have similar co-operative structures. 

That has made it easier to explain the details of our bank, which has of course helped us attract investment from different sources. I think that is one of the reasons we have regional investors in the form of Shinkin banks for example, which certainly have similar corporate structures.

Green, Lloyds:Yes, regional investors are also very important to our Samurai efforts, though I am not sure that they are more important this year than before. As we look to diversify our investor base, we have spent time seeing regional investors to educate them on the credit story in an effort to broaden our investor reach on funding trades.

globcap

: Have Japanese domestic investors also begun to invest more heavily in bonds outside of the yen market, in search of higher yields?

Iloniemi, OP Financial Group: It is well known that many Japanese investors are looking at the other markets, especially the dollar market. This is one factor as to why the basis swap has not worked for us this year. 

If investors are selling yen and buying dollars, when we need to do the same thing, it can put a lot of stress on the basis swap. However, there are so many factors feeding into the basis swap that it becomes very difficult to anticipate how it will move.

jp 8.9

Amalou, SMBC Nikko:Yes, and you have seen a flow of foreign investors buying Japanese government bonds after they went negative earlier this year. That is because investors have been able to generate a spread over US Treasuries by buying those sovereign bonds at negative yields, and then swapping them into to dollars. But by the same token, Japanese investor demand for international bank names has also been healthy across currency markets, not just the yen public sector space. 

Littorin, Nordea:We have noted an increase in appetite amongst Japanese investors for non-yen assets. This prolongs the trend we have seen for some time where investors diversify into non-yen assets seeking increased absolute return. As a consequence, we see Japanese investors in our order books for dollar or euro denominated issues.

globcap

: How prominently do foreign investors feature in Yen? Do you worry about cannibalising your dollar investor base by issuing in the Samurai market? 

Charbonnel, BPCE:From what we are able to see, foreign investors have remained fairly small players in yen. No, we do not worry about cannibalising our dollar investor base by issuing in the Samurai market. It seems to us that the Samurai market remains by and large a domestic market.

globcap

: It has been said that the Samurai market is somewhat sheltered from events in other regions. With domestic investors paying more attention to opportunities outside of Japan, is the yen still an opportunity when other world markets are closed?

Charbonnel, BPCE:This is what we experienced ourselves in July 2015 during the Greek crisis. We were able to complete our Samurai bond issue despite this event affecting the euro market as well as other markets. So we hope that this will be the case again in the second half of 2016.

Green, Lloyds: The Samurai market has proven to be resilient to macro events so it is feasible that issuers will plan for trades in the fourth quarter, when there are fears of market dislocation from political events. 

However, credit markets have proven to be very resilient to headline risks in 2016, helped by the overall levels of liquidity in the system, so it is possible that fears are overblown and markets enjoy a more stable second half in 2016 than had maybe been expected.

Amalou, SMBC Nikko: We have experienced in the past that execution is still possible even when there is heightened volatility elsewhere. 

But clearly that decision still rests against a good balance between demand from the investor side, and where the basis swap lies. The latter does not move in isolation. It is influenced by what happens in cross-market issuance flows in yen and dollars, as well as diverging interest rate policies between the BoJ and the Federal Reserve, and underlying investment flows. 

Since July interest rates have actually increased a little in Japan. The move has been marginal but it can still change the dynamics of the market. We were very coupon-driven in May and June but if rates keep rising we may revert to pricing over yen offered swaps once more, which could help more supply filter through.

globcap

: How does the execution process for Samurai bonds differ from other securities you issue? For repeat issuers, has the process changed much since you first entered the market?

Green, Lloyds: The biggest difference remains one of time in the market. Time zones do not help, but the fact that execution takes place over a multiday period can make execution seem slow, especially given the speed at which dollar and euro trades come together. Pricing deals in the middle of the night is also a difference!

As a repeat issuer, we have seen a slight shortening in the process — four days to three days — but there is still some way to go.

Charbonnel, BPCE: Yes, in comparison with the euro and US markets, the major difference is the duration of the bookbuilding and pricing — typically four to five days in the Samurai market, when it is done within less than one day in the euro and US markets. The major Japanese players in the Samurai market should consider reducing this duration. I believe that would be beneficial to the Samurai market, especially when timing is key as far as swap rates are concerned. This has not changed significantly since we first entered the market.

Littorin, Nordea: One of the key differences between the execution process for broadly marketed yen bonds and other major institutional markets in which we are active is the duration of the formal marketing process — designed to facilitate the lengthier approval processes of many Japanese investors — combined with the convention that the deal will be priced within the original marketing range — again, to facilitate the approval processes.

At the margin, we have seen some efforts made to trim marketing periods, but it still seems to be the minimum expectation that a borrower accommodates three days of marketing with pricing to follow on the fourth morning.

Similarly, we have noted some efforts to refine the approach to price guidance, with initial ranges narrowed somewhat to provide greater certainty around landing points, and the odd transaction marketed from the outset on a single number or single number area basis.

globcap

: How important are Japanese ratings for investors?

Charbonnel, BPCE: It is 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.

Green, Lloyds: This seems to be an area that is evolving. For holdco senior and tier two trades, the local rating seems to be helpful in reaching the rating threshold that Japanese investors have. It is less of a factor for opco senior funding trades.

Tanaka, Rabobank: If you have the benefit of a single‑A rating, your bonds are eligible to be part of the Nomura Bond Performance Index in Japan. For a lot of fund managers, that is a fiduciary requirement for any public bond they buy. If your tier two bonds do not have a single-A rating from the usual rating agencies, it may be beneficial to get one from a Japanese agency if you can.

That does not apply to us, because our tier two issues have the benefit of single-A ratings from Moody’s and Standard & Poor’s. But it is no secret that some Japanese rating agencies may not be as severe in their outlook as other agencies. 

Littorin, Nordea: In our experience, Japanese investors mainly refer to credit ratings assigned by Moody’s and S&P when analysing non-Japanese credits.

globcap: What lies behind the Samurai market’s enduring appeal?

jp 8.10

Purton, Daiwa Capital Markets Europe: I think the real calling card of the yen market is the investor base. You are accessing a truly complementary set of investors, as there is very little investor demand from accounts outside Asia. So, when you issue a Samurai, you are looking to place the bonds into an investor base that is unlikely to buy your debt in size in any other currency or product. Global investor reach is so important these days; with markets being volatile and subject to sudden dislocation, it is important to have access to as many pools of demand globally as possible.    

By Tyler Davies
27 Sep 2016