Japan’s top credits assess which markets work best
It might be easy to imagine that Japan’s top credits have an easy time accessing the international bond market. Compared to high yield or debut issuers, that may be so. But a strong rating and an important role in public policy bring with them certain responsibilities — not least of which is keeping funding costs down. The rise in dollar interest rates, and the volatility that is sure to result, thus represents a conundrum for these issuers. What is the right price for a dollar bond? What is the correct attitude to maturity adjustment? GlobalCapital asked these and other questions during a roundtable discussion that took place in Tokyo shortly before the end of the fiscal year on March 31, 2018.
Participants in the roundtable were:
Masaaki Ebisu, director, capital markets and funding division, Japan Bank for International Cooperation (JBIC)
Hideaki Ishiyama, director general, finance department, Japan Finance Organization for Municipalities (JFM)
Hiroyuki Kawae, manager, finance management section, East Nippon Expressway (E-Nexco)
Akiyo Miyakawa, director, division of financing, treasury department, Development Bank of Japan (DBJ)
Tanaka Satoko, director, capital markets division, Japan International Cooperation Agency (JICA)
Naoki Sato, director, bond section, budget division, Bureau of Finance, Tokyo Metropolitan Government (TMG)
Tatsuya Yasuda, head of international DCM, debt capital markets department, Nomura
Matthew Thomas, moderator, GlobalCapital
Masaaki Ebisu, JBIC: Under the rising volatility in the market, it becomes even more important for us to identify an appropriate issuance strategy and a reasonable funding level that will balance our target and investors’ appetite. In the Japanese fiscal year from April 2017 to March 2018, we issued $14.5bn of foreign bonds. Given the very favourable market conditions, we enjoyed tremendous support from investors.
Looking back at 2017, we tried to be flexible to effectively capture the appetite of a variety of investors with different needs. For example, in May, we launched $5bn in one shot — that is a sizeable deal for any issuer. We split the deal between three year, five year and 10 year tranches, and added one floating rate tranche to branch out the investor base. By having that variety of funding tools, we were able to respond to investor demand and really make the most of the differing needs of our investors.
Our funding plan for 2018 is still being discussed in the Japanese Diet at the timing of this roundtable, but the projection at the moment is for a $15bn foreign bond issuance budget.
I’m sure it is no surprise to investors that we are planning to return to the foreign bond markets in similar size this year, but for the next fiscal year in 2018, there are certain things we need to be aware of. With interest rates rising and the yield curve flattening, we may need to adjust our strategy in tapping the market so we can capture investor demand appropriately.
Hiroyuki Kawae, E-Nexco: In this fiscal year, we had a funding budget of ¥460bn, with bond issuance accounting for around ¥400bn of that. Dollar bonds are something that we issued in the current fiscal year, although it is not public issues but rather private placements that we focus on. We’re targeting domestic investors to issue those deals, so we’re a little different to some of the other issuers on this panel. Regional banks are the major investors of our bonds.
We used to issue bonds with a five year maturity, but this fiscal year we added two year bonds to our funding mix, too. In the Japanese yen market, given the monetary easing and the extremely low deposit rates, many investors are buying our bonds as a substitute for deposits.
For the next fiscal year, we will raise ¥400bn, with one or two year bonds and five year issuance amounting to ¥300bn in Japan and international markets.
Akiyo Miyakawa, DBJ: We are going to issue the equivalent of maximum ¥200bn in the dollar bond market with the use of government guarantees in the next fiscal year. But we do not just rely on government guarantees. For instance, we raised $1bn from a stand-alone deal this fiscal year. That was a sustainability bond, helping us cater to a growing investor base. We also issued some private placements without a guarantee, targeting specific investors including dollar investors.
We want to diversify our investor base and we have been issuing to that purpose for many years. The dollar bond market remains our primary market. Unless the market environment changes dramatically, it will remain our primary market in the next fiscal year.
Hideaki Ishiyama, JFM: For this fiscal year, we raised a bit less than ¥840bn. We have sold two foreign bonds every year for the last six years. We turned to the market in April with a $1bn five year bond and followed up a same-sized three year deal in August. We were able to cater to the needs of central banks with the latter deal. We tend to swap our deals and convert them into Japanese yen, so a key consideration for us is the after-swap funding cost. This is not always transparent.
Tanaka Satoko, JICA: In this fiscal year 2018, we plan to issue the same as the previous year, both in the dollar market and the onshore Japanese yen market.
We are looking to issue $500m sometime between April and June. The tenor is undecided as of now, but we prefer a longer tenor, which for us means five, seven or 10 years. That would ensure it matches the duration of our assets.
For the Japanese yen issuance, our plan is to raise a maximum of ¥80bn. We are planning to issue on a quarterly basis starting from June 2018.
Naoki Sato, TMG: We hear that international investors and markets are expected to have continuously strong demand for Japanese SSA bonds in the dollar market. On the other hand, some domestic investors are expected to have weaker demand for foreign bonds due to regulation by Japanese financial authorities as well as rising dollar funding costs.
To issue foreign bonds at the right time, careful observation of investor trends and the market is thus important.
We’ll decide our funding plans based on the funding needs of TMG in addition to such market conditions mentioned earlier.
Satoko, JICA: There has not been new dollar issuance by Japanese SSAs recently, and we do not have a clear vision of how the market is seeing Japan at the moment.
Nonetheless, we hear that global SSA bonds are supported by strong investor demand and are performing well despite the recent increase of market volatility both in the primary and secondary markets, and we hope that this market trend continues.
Tatsuya Yasuda, Nomura: When I look back to our discussion last year, I remember that a lot of issuers already anticipated that US interest rates would increase and that, given the uncertainty of the events expected and its market reactions, risks might be rising. In that sense, the market situation this year is not new to market participants — everyone is expecting US interest rates to rise, as well as other potential market risks such as Trump and fiscal policy changes. However, we are getting to the point where it is no longer simply a talking point. It is happening now, and that may force a change in strategy for issuers.
Last year’s market environment was more stable than a lot of people anticipated. Although the market expects tapering, the liquidity we saw last year will not dry up immediately in 2018. However, the pace of rate hikes is likely to accelerate and investors are going to react much more noticeably later this year. Volatility will rise as a result, which in turn will change investor behavior.
This change is not going to be immediate. We will not see investors switch into other asset classes overnight. Japan is one of the strongest credit brands in the world. Nonetheless, it offers good opportunities for investors to expect spreads. There is still going to be major demand for Japanese issuers, but investors will be becoming increasingly selective with tenor, currency and timing. For issuers, flexibility is going to be more important this year.
Ebisu, JBIC: We saw a continuous tightening of spreads in 2017. When the Japanese government was downgraded in September 2015, there was naturally a widening of spreads but since then spreads have continued to move lower. Japanese credits are not experiencing any major change in investors’ views. We now have a strong political leadership in Japan, which is definitely something that international investors have welcomed.
This doesn’t mean that we will not have to pay some premium to investors in this changing environment. As we have done in past issuances, what we have to do is carefully watch the market environment and strike a good balance between investors’ appetite and our target funding cost. But although the cost of funding is one of our primary benchmarks, we also try to pay equal attention to how we can establish strong confidence for our name in the bond market.
Kawae, E-Nexco: We saw some spread tightening during the past year and some investors have become more reluctant as a result. We want a more stable investor base so — can we tolerate rising prices going forward? It really depends on the market. We will always try to respond to the pressure investors face in the market. When they take a particular view on what needs to happen to pricing, we will try to respond to that with a flexible approach.
Miyakawa, DBJ: This is something we think about a lot. US-based investors seem to have been showing as a stronger presence in the order books for Japanese SSA bonds in the past year. Are they going to continue to invest further in the future as US rates continue to go up? If not, we have to seek alternative investors. We cannot expect too much demand from Japanese investors either, given the context of rising hedging costs. We need to think carefully about the extent to which other investors can replace US accounts if their appetites change, and to what extent we need to adjust our pricing. This remains an ongoing question for us.
Ishiyama, JFM: The most important point of consideration for us is the funding cost after swapping into Japanese yen, but cost is not the only factor. We also want to make sure our bonds perform well in the secondary market. That is a sensible approach for an issuer that has long-term, recurring funding needs, but it means you have no choice but to be flexible as the environment changes.
Ishiyama, JFM: This is a difficult question. If foreign bonds don’t meet our funding cost target, we certainly have other options. But we have to consider whether those options would also become more expensive as dollar funding costs rise. There is a chance that issuers find an alternative to dollar bonds, all adopt the same strategy in the same market, and quickly eradicate any funding cost advantage. This is something we need to watch out for.
Miyakawa, DBJ: If the funding cost in the dollar market doesn’t work, one option would be the euro market. But in terms of size, it will not be sufficient on its own. Euro-yen bonds could be more compelling, but then you have the recurring question of the swap level. Considering that the main purpose of our foreign bond issuance is to spread the investor base, issuance in Tokyo’s Pro-Bond market would not work for us either, since it would force us to rely even more on domestic investors.
Kawae, E-Nexco: There are other currencies we can tap. For example, the Hong Kong dollar or Australian dollar markets. But the market size is small compared to the euro or dollar markets. How much demand can we realistically secure? The other channel for us is the yen bond market, but when this doesn’t work we can turn to banks for funding. There are some options for us to use as backstop when we need it.
Sato, TMG: TMG focuses mainly on the dollar market. We have been issuing dollar-denominated bonds for seven straight years now and have issued in 144A/Reg.S format since FY2016.
Since FY2015, our new dollar issues have been listed on the Tokyo Pro-Bond market as well as the London Stock Exchange. We’ve been aiming to invigorate the Pro-Bond market, which we think is still at a developing stage. But other markets such as the euro market might be an alternative to the offshore dollar market.
Satoko, JICA: For us, the offshore dollar market itself is an alternative funding means as our main operation currency is Japanese yen. We are not looking at other currencies as of now. Regarding Tokyo Pro-Bond, we understand it is gradually growing with more issuers listing their bonds.
Yasuda, Nomura: The euro bond market certainly offers diversification opportunities for issuers, but from a funding cost point of view it has rarely stood out. The dollar bond market has offered cheaper funding for Japanese issuers for a long time, with only occasional blips. But in terms of providing a support channel during periods of increasing dollar volatility, the euro continues to be there. It is not taking centre stage, but it is still an important option for issuers.
Satoko, JICA: We understand that euro market issues have performed extremely well since the beginning of 2018, and it appears attractive in our eyes as well. In addition, issuing in the euro market is particularly appealing to us as it would allow us to easily approach ESG focused investors in the region.
Nonetheless, we have not yet issued euro bonds because it is not our operating currency. We also have to consider the cost of hedging euro proceeds if we were to issue in the euro market.
For FY 2018, we are not planning to issue in the euro market but it is on our table for consideration in the future.
Miyakawa, DBJ: The one advantage the euro bond market has over dollars is the depth of the socially responsible investor (SRI) base. We issued our first green bond and first sustainability bond in euros and, of course, that was a major consideration for us when picking the currency of issuance.
Sato, TMG: TMG swaps all the funds raised in foreign currencies to Japanese yen through a cross currency swap and uses them to cover our expenditure budget. Funding costs really matter to us. At the moment, dollar-denominated bonds are better than euro-denominated bonds from a funding cost perspective, but euro-denominated bonds could be cost beneficial in the future, depending on market conditions.
Yasuda, Nomura: Japan’s economy has not fared very well for almost three decades now. There are still structural problems, given the demographics and the decreasing population, which the current government is struggling with. On the other hand, the Japanese political situation is very stable at the moment, and the government is shifting to more focus on economic growth. Such political stability has made global investors feel conformable.
Japan is a developed and mature country, and a high GDP growth rate is not necessary and perhaps even not achievable. Given the political stability and its consistent policy operation, Japan would be highly valued by international investors.
Miyakawa, DBJ: This is something we echo. We always make clear to international investors that the stable government in Japan makes a solution to the country’s problems so much more realistic. The government of Shinzo Abe is firmly committed to economic reforms and the benefits of those reforms are slowly starting to be seen. Although the Bank of Japan has still not hit its 2% inflation target, economic growth is improving.
Satoko, JICA: The relationship we have with the government is very robust and inherent in our operations. As a matter of fact, our dollar-denominated bonds are all government-guaranteed, and we believe we were able to access broader investor base thanks to the guarantee.
With regard to the impact of the changes in Japan’s economy, the monetary easing policy has had a significant impact not so much on the borrowing levels but on the facilitation of issuing bonds in the onshore market.
Sato, TMG: If Japan’s credit rating is downgraded due to changes in the Japanese economy, TMG’s credit rating could also be downgraded and lead our funding costs to increase. But such a scenario is unlikely to happen under the current economic conditions in Japan.
We understand that under Abenomics, Japan has been seeing an economic recovery, including improving earnings and employment. In Tokyo, tax revenue had increased by about 3% year-on-year in FY2016, reaching over ¥5.3trn.
Ishiyama, JFM: The bulk of our business is making loans to local governments, so the health of those governments is crucial for international investors trying to understand our credit. The fiscal management of local governments is sustained by budgets that are closely linked with the central government, so we are also very dependent on the health of the wider economy. The Abe administration has given the economy a shot in the arm, which is something we welcome very much.
Ishiyama, JFM: In September last year, we sold our first three year bond. It was very attractive cost-wise. In view of the monetary environment, two and three year bonds are looking very cost-efficient for issuers at the moment.
The investor base was actually very different to our usual benchmark dollar bonds, which was an interesting result for us. That means it isn’t just attractive from a cost perspective — it also allowed some diversification benefits. It is definitely something we will consider more in the future. It gives us extra options.
Miyakawa, DBJ: Since the maturities of our assets are relatively long, we prefer to keep longer tenors on the funding side as well. Five and 10 year US dollar bonds are our preferred maturities and that is likely to continue. The exception to this is in Japanese yen-denominated bonds, where we often sell three year bonds. Because of these deals, as well as the asset-liability mismatch, we are unlikely to move to shorter tenors in the dollar bond market in the foreseeable future.
Kawae, E-Nexco: We don’t have much flexibility with it comes to tenors. The net proceeds will be used for highway construction and as such the tenor of ours bonds are designed to cover the construction periods plus a few years as a risk buffer. This does not mean we cannot issue short tenor bonds. We sold a two year bond this fiscal year and will issue a one or two year bond next fiscal year due to the completion of Chiba prefecture’s project in the Tokyo Gaikan Expressway during the first quarter.
Ebisu, JBIC: The asset-debt maturity gap is a major factor we have to manage, too. We have financing needs of around $10bn, so we definitely want to offer as many options to investors as we can. We fund in three, five and 10 years. The three year deals are popular with central banks and asset managers, which adds some investor base diversification for us. Three-year bond are a new strategic funding product for JBIC to diversify and maximize investor appetite, even more so when we also use floating rate notes. We will try to effectively use three-year bonds, carefully watching the volatility and investor appetite in the market.