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Japanese corporations join the bond party

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Japanese issuers are tapping the international bond market in droves, pushing volumes to a record in 2017. The market is set to get a further boost this year, as more corporations enter the fray. Rashmi Kumar reports.

MIZUHO FINANCIAL Group, Mitsubishi-UFJ Financial Group and Sumitomo Mitsui Financial Group. In addition to being Japan’s three megabanks, something else links these huge institutions together — they were the most prolific issuers of international bonds last year.

Of the total $122bn raised in the international public bond market by Japanese issuers during the year ending March 31, 2018, about $49bn was by Japanese FIG credits. Their dominance is unlikely to wane, with ratings agency Fitch predicting that Japan’s megabanks could issue as much as $50bn in securities eligible as total loss-absorbing capital by the year ending March 2019.

But investors are slowly getting more variety — thanks to corporate borrowers. DCM bankers in Japan point to AA- rated car maker Toyota Industries Corp which debuted in the dollar bond market in March with a $1bn dual-tranche issue.

“This was pretty significant, as it was a debut issue for a company that has a 90-plus-year history but is using the international debt market for the first time,” says a DCM banker in Tokyo. “Not only that, we have been in discussions with multiple corporate issuers who are looking at dollars in the coming year or two.”

One key reason for the rising interest from corporations for international bonds is the attractive funding cost as the bank loan market gets more expensive.

According to a senior DCM banker at Morgan Stanley in Tokyo, the relationship between Japanese banks and Japanese corporations has long been primarily based on bank borrowings rather than international capital markets.

“Historically, corporate clients have been dependent on bank borrowings to raise money,” he says. “But the more the banks raise funds internationally, the more spreads go wider for bank borrowing.

“For corporates which are highly rated IG clients, it makes sense for them to raise funding independently from capital markets, so they will become less dependent on bank borrowings to diversify their funding sources.”

But funding choice is not the only reason corporations are venturing to the international debt market.

Expansion boom

The need to go global is also playing a big role. Bankers say companies are busy expanding internationally, and so need dollars to pay for their M&A plans. Such firms typically keep the bond proceeds in US dollars, but if the trade is unrelated to offshore expansion, many swap the funds into yen to take advantage of arbitrage opportunities.

Bankers point to transactions from the likes of SoftBank Group Corp, a holding company with operations in mobile and fixed line telecommunications, broadband, internet and other businesses, which raised $4.5bn from a dual-tranche bond in July 2017, following it up with a $6bn-equivalent dollar/euro combo bond.

Asahi Group Holdings, meanwhile, nabbed €1.2bn from a dual-tranche trade in September 2017. Asahi’s bond proceeds were earmarked for repaying short-term loans raised for the acquisition of beer businesses in central and eastern Europe.

Despite the pick-up in action, there has never been a question around demand. Ryota Suzuki, co-head of Japan DCM at Bank of America Merrill Lynch, reckons the global investor base that can buy Japanese paper in general is getting “bigger and bigger”.

“Japanese credits are very stable,” he says. “Therefore, many global investors are looking to have exposure to Japanese issuers. Some Japanese banks and issuers are also starting to issue SEC registered bonds, which tap global investors.”

For instance in November last year, Orix Corp, a financial services company listed in Tokyo and New York, bagged $700m from an SEC-registered offering — part of its strategy to have funding flexibility and diversification of funding sources.

Having a mix of Asian and US investors is helpful for Japanese issuers in the long run. DCM bankers agree that the Reg S dollar investor base has been expanding over the years. According to Masanori Kazama, part of Nomura’s international DCM team in Tokyo, Asian investors are buying Japanese overseas issuance. He adds that issuers too have diversified in terms of tenors, adding shorter maturities — like three years — when compared to the past, and so capturing a new investor base overseas that is not able to participate in tenors of five years or longer.

But the growing Asian investor base doesn’t mean US accounts are any less important.

“Even if the size [of the deal] is $500m, it makes sense to go to the US too, as the more investors come in, the more diversification you can get,” says the senior Morgan Stanley DCM banker. “Asian investors also appreciate when US investors support the deal from a quality and liquidity perspective.” 

He adds that in general, he would recommend issuers to go to the US too, not just Asia, so they can tap into the global US dollar investor base. This, he says, will help borrowers price tighter and get more liquidity as more high quality investors come in.

For investors, a big draw is Japanese issuers’ ratings, as a large chunk of the borrower group is in the investment grade bracket.

“For investors, Japanese issuers are high quality,” says Katsumi Ishibashi, director of research, fixed income, at Fidelity International. “Banks are single-A rated and corporates single-A to triple-B — SoftBank is an exception but most are high quality credits. We have visibility over their operations and for investors, it is more a lower risk, lower return investment.

“Plus, [international investors] can get support from onshore accounts that buy US dollar bonds issued by Japanese issuers,” he adds. “They are sticky investors for the bonds, supporting the bonds’ stable performance, while we don’t expect much spread tightening.”

Bankers add that Japanese names still continue to have scarcity value among global portfolio managers, explaining why their interest for the country’s bonds is rising. The biggest buyers tend to be US investors, followed by European and Japanese accounts that can invest in non-Japanese yen securities.

But the appetite of the latter group could slowly wane.

FSA clampdown

Last year, Japan’s Financial Services Agency, the financial watchdog, started monitoring regional banks’ investment in foreign bonds. Squeezed by the negative interest rate policy in Japan, some domestic investors had racked up their purchase of foreign currency denominated bonds in a bid to make money. But when their bond investments took a hit, the FSA stepped in.

“After the negative rate implementation in 2016, investors started to look for non-yen investments, like dollars or euros,” says Kazuma Muroi, executive director at Mitsubishi UFJ Morgan Stanley Securities Co’s DCM team. “But after the rate hike in dollars and euros, the majority of the investors made a loss.

“The Japanese FSA started to closely monitor the investment behaviour, especially among regional banks,” he adds. “So they are becoming sensitive when it comes to investment in non-yen bonds. Their behaviour was impacted by the rates movement overseas, plus the new monitoring stance taken by Japan FSA on non-yen investments.”

When it comes to the megabanks, Mizuho’s portfolio of Japanese government bonds, for instance, carried a net loss of ¥7bn during the nine months ending December 2017 versus a loss of ¥160bn in its foreign bonds portfolio, according to a note from CreditSights, an independent research provider, in early February. Sumitomo Mitsui Financial Group posted a loss of ¥125bn on foreign bonds, while MUFG had gains of ¥53bn.

Bankers add, however, that investment losses among the megabanks are less of a concern than at the regional banking level. And while the FSA is cracking down on the latter’s foreign bond portfolio, bankers reckon it’s a step in the right direction to steer the firms away from taking on too much risk.

The FSA’s clampdown aside, DCM bankers point to a more recent, and positive, development for borrowers.

More funding avenues

In addition to the traditional dollar or euro debt, Japanese firms now have an additional source of funding available — Panda bonds. Chinese and Japanese officials kicked off the race for the first Panda deal, renminbi notes sold in the Mainland by non-Chinese firms, in December 2017 when they agreed to an audit oversight over each other’s markets, paving the way for Samurai and Panda issuance.

The first Panda trades emerged on the same day in January when MUFG Bank and Mizuho Bank kicked open the market. The former raised Rmb3bn from a 5.3% thee year note, while the latter bagged Rmb500m from a similar 5.3% three year.

“The Chinese regulator has started to ease rules for non-Chinese companies, including Japanese, to issue Panda bonds in the Chinese market,” says Yoshihiro Inoue, executive director, international debt origination, debt capital market, Daiwa Securities. “So if there’s further clarification, then potentially there will be more Japanese issuers issuing in the Chinese market, to fund in renminbi.”

With the global market opening up further for Japanese issuers, bankers are confident of further progress. They do point to two potential snags, however — geopolitical issues and a political scandal in Japan. In terms of the former, a downside risk to Japan’s trade outlook stems from the US’s decision to impose tariffs on steel and aluminium imports. If this escalates further, it could have ramifications for the country’s corporations.

On top of that, a threat internally in Japan is to prime minister Shinzo Abe, who has been embroiled in a controversial government land sale to an elementary school operator. The issue has hit Abe’s popularity, but for now, bankers say international investor sentiment has not been dented. But if the situation gets more complicated and Abenomics — a term used for Abe’s economic policies — comes under pressure, then there could be an impact.

But for Ishibashi at Fidelity, credit ratings are a big concern.

“Japanese government bonds are now rated A+ by S&P and A1 by Moody’s and there is some medium and long-term pressure of a downgrade,” he says. “That would constrain the credit rating of banks. If they get lower rated, then it will increase their costs of funding and will also affect short-term funding.

“In terms of JGB rating, a one notch downgrade is OK. But two notches will be a problem because this could affect the banks’ access to short-term funding. A one notch downgrade is a risk in the next two years, while more than two notches is a three to five year risk.”     

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