Japan’s top credits: navigating volatility
Japanese issuers are among the best-regarded in the world, offering global investors a safe haven at times of heightened volatility. That is now more important than ever. Their last financial year started amid widespread trade disputes between China and the US. It ended with the global spread of Covid-19, a pandemic that threatens to fundamentally alter the capital markets. GlobalCapital talked to a group of Japan’s top issuers to find out how they have navigated the volatility — and what they’re planning next.
Participants in the roundtable were:
Yoshitaka Hidaka, director, capital markets and funding division, Japan Bank for International Cooperation (JBIC)
Kosuke Ito, director, division of financing, treasury department, Development Bank of Japan (DBJ)
Ryo Saeki, director, bond section, budget division, bureau of finance, Tokyo Metropolitan Government (TMG)
Hirotsugu Ueda, director of finance, finance department, Japan Finance Organization for Municipalities (JFM)
Tatsuya Yasuda, head of international DCM, Nomura
Moderator: Matthew Thomas, Asia bureau chief, GlobalCapital
GlobalCapital: Let’s start by taking a look back at your funding plan over the last 12 months. The world has been gripped by uncertainty over the last year, even before the coronavirus caused huge volatility in global markets. How have you navigated this?
When deciding the timing, amount, and maturity of our bond issuance, we essentially take into account our asset-liability management needs and the trend of the market at the time of issuance. The goal is simple: we want to make it easy for investors to buy our bonds. Last year, by paying more attention to these points, particularly being flexible on the type of bonds we issued, we were able to achieve significant oversubscription in all bond issues, even in difficult market environments. In particular, the total order book for our three-year notes in January this year was the highest ever for us, with approximately $85bn of demand.
Ryo Saeki, TMG: TMG raised $1bn from foreign bonds in May 2019. Due to remarks by US president Donald Trump about additional tariffs on China just before the deal launched, the execution was carried out under deteriorating market conditions. However, it was successfully issued as planned. Although the market was highly volatile, we believe that our careful judgement about the timing of the issuance led to a smooth and successful deal.
Kosuke Ito, DBJ: In 2019, we issued international bonds through two public offerings, one of which was a dollar-denominated five and 10 year dual-tranche government guaranteed bond; the other was a dollar-denominated five year sustainability bond, which did not have a government guarantee.
Fortunately, we did not have to change the timing of our funding for these two bonds, but the market conditions on both occasions were difficult. The first deal faced a problem with a flat yield curve, which meant there was almost an absence of 10 year bonds before we opened the books; the second deal was threatened by volatility caused by the US-China trade war.
We managed to get these deals done with strong support from our lead managers. We were very careful about where to start initial price talk, and about how to manage the bookbuilding process.
That helped us tighten pricing during bookbuilding. We were able to complete our funding plan with strong support from quality investors, including central banks and dedicated SRI investors. The subsequent secondary market tightening of these bonds was a welcome consequence of our careful approach.
Hirotsugu Ueda, JFM: JFM usually issues two non-Japanese yen benchmark bonds around April and September each fiscal year. But since there were many volatile events expected in fiscal 2019, we decided to do pre-funding for the first time. We issued in March, right at the end of the 2018 fiscal year, instead of our usual issuance at the end of April. This proved a wise decision.
We were able to enjoy favourable market momentum in March and get strong demand from investors. In February 2020, the market was volatile due to the rising tensions in the Middle East and the spread of the coronavirus, but we managed to issue our first green bond at a fair value. We held a roadshow before the deal to pitch investors, but we also went back and checked with them on their level of demand afterwards.
GlobalCapital: Japanese borrowers can perhaps be expected to benefit from global uncertainty, given the country’s high-standing among international investors. Have you experienced that?
Japanese issuers have gradually strengthened their relationships with SSA investors for a few reasons. First, Japan is a unique developed country which has maintained a good relationship with both the US and China, thus making it less vulnerable to trade and geopolitical issues.
Second, in terms of geographical diversification for investors, Japan is a clear choice. It is one of the best sovereign names in Asia and boasts ample liquidity among SSA credits. Finally, in terms of its rating, Japan is lower than other major developed countries, thus we can expect relative value.
There have been new investors, particularly central banks and supranationals, who like the increased liquidity of high-grade Japanese SSA bonds. There has also been a rise in demand from banks and asset managers who have been looking to deploy their abundant cash holdings.
Saeki, TMG: When we sold US dollar bonds last year, we were able to strengthen our investor base, with participation from central banks and public institutions increasing to about 50%.
We believe this was primarily owing to the high quality credit of TMG, as well as our continuous dialogue with foreign investors through roadshows, but it may have also been contributed to by the increased preference for Japanese names in an environment of higher uncertainty.
Ito, DBJ: Japanese government bonds are rated A1 and A+ by Moody’s and S&P, respectively, which are lower ratings than other major OECD countries including the US, the UK, Canada, France and Germany. As a result, Japanese SSAs, including us, pay an additional spread for international bond issuance compared to higher-rated SSAs such as KfW and EIB.
But this also means international bonds from Japanese SSAs can be very attractive to international investors, who may feel that Japanese SSA bonds provide better relative value on a risk-adjusted basis, given the substantial, sound credibility of Japan as a country compared to its credit rating. We think DBJ can grow its investor base partially by welcoming investors with this kind of strategy.
Ueda, JFM: JFM consistently issues benchmark bonds every year and regularly meets investors, so we believe investors have enough understanding about our credit.
We have been able to issue benchmark-sized bonds in tough market conditions. We have heard from investors that Japanese names pay attractive spreads compared to AAA rated EMEA agencies and supras, even though we are highly valued in terms of credit. We also saw new investors opening credit lines for Japanese names last year. JFM recently issued a green bond in euros for the first time in more than five years. We have managed to diversify our investor base, with new green bond investors and European investors participating in our deal.
Hidaka, JBIC: Since taking my position at JBIC in August 2019, I have met with investors across the globe to hear their views and there are strong needs among them to include Asian assets in their portfolios.
Among the Asian credits, Japan is seen as special. We are also benefiting from a global reduction in interest rates as some investors have looked for higher return products amongst SSAs. In fact we saw new central banks coming into our deals last year.
With this in mind, we have started discussions with some central banks and official institutions to further expand our investor base.
GlobalCapital: The US dollar market is clearly the most important offshore funding market for Japanese borrowers. But do you have plans to issue in non-US dollar currencies, including euros?
Saeki, TMG: TMG swaps all of the funds we raise in foreign currencies into yen to hedge the risk and to use the money to cover our expenditure. Although US dollar-denominated bonds have been more competitively-priced than euro-denominated bonds, we recognise that the difference is shrinking and no longer as significant as before. Therefore, euro-denominated bonds could also be a strong candidate, depending on future market conditions.
As our international activity expands in terms of the markets or regions we cover, we face needs to raise capital in various currencies. We currently have exposure to various currencies including Japanese yen, US dollars, euros and sterling. Therefore, we are now considering issuing international bonds not only in dollars, but also in euros and sterling.
Ueda, JFM: JFM looks at funding costs, asset-liability management and investor demand when issuing benchmark non-Japanese yen bonds and the euro has been one of our options. We issued our green bond in euros recently and will continue to issue in non-yen currencies, including euros — as long as the deal makes sense.
Hidaka, JBIC: For the past few years, JBIC has not issued in euros or other foreign currency denominated bonds but the US dollar. Our strategy is to keep a long-term relationship with existing investors by maintaining our position as a frequent issuer of US dollar benchmark bonds.
That does not mean we will rule out issuing bonds in other currencies, including euros. If we have euro funding needs, or we see a funding arbitrage by raising euros and swapping to dollars, we will be active in this market.
Yasuda, Nomura: The euro market could be an option for Japanese issuers in light of cost. Nomura has often observed that the issuance cost of euro bonds is competitive to that of the US dollar, due to a tightening of spreads as a result of the ECB’s bond-buying, as well as the movement of the basis swap. The euro market is also starting to make more sense for Japanese issuers. Given their current overseas business expansion and the need for diversified financing, the euro market is quickly becoming a more attractive funding option. On the other hand, the sterling and Australian dollar markets are also an option, although they do tend to be more costly.
GlobalCapital: What are the main concerns that international investors express about the Japanese economy when you meet them? How do you address these concerns?
Yasuda, Nomura: Despite the high debt-to-GDP ratio, Japan’s economy is well managed. Few international investors have big concerns over the Japanese economy at the moment. One of the largest risks, I think, is that major rating agencies may downgrade Japan’s sovereign rating as a result of the high debt level.
That would have an impact on demand. Japan should continue to discuss policies to control expenditure for the ageing society, as well as to enhance the discipline of fiscal policy. By the way, there is an increasing concern that we might see such likelihood more if further government spending materialises as a counter-measure to the economic downturn due to Covid-19.
Ito, DBJ: Each investor has their own concerns, some of which are shared with the majority, but some of which are unique. We think many investors are interested in how the Japanese government will manage risks associated with its huge amount of debt, ageing and shrinking population, and seemingly unsustainable pension system.
What we can do for these investors is provide the best available information from the public, our lead managers and our internal resources, including the knowledge and information coming from our economic & industrial research department.
While not all of these can be addressed solely by TMG, we have helped investors understand what Tokyo is doing to alleviate the declining birthrate, for example.
Hidaka, JBIC: Today, a shrinking, ageing population is a serious and common challenge for most developed countries. To cope with this challenge, it is necessary to expand the social system to make it easier for married couples to have and raise children, while still allowing them to continue their work. The traditional view of the labour market in Japan is changing.
GlobalCapital: What is your view on the Bank of Japan’s negative interest rate policy? If the negative interest rate policy came to an end, how would that affect your funding plans?
Yasuda, Nomura: It is a standard of monetary policy to keep the policy rate low when the economy is not in good shape. Given that principle, and Japan’s current economic situation, we can say the negative interest policy is justified to some extent.
Even if the negative interest policy ends, we believe there would be no serious impact on financing as long as the quantitative monetary easing continues, which keeps a good balance between supply and demand in the market on the back of abundant market liquidity.
On the other hand, if both the negative interest policy and quantitative monetary easing policies come to an end, the market would then be considered to be recovered enough for investors to invest in risk assets more actively. That would provide issuers with a variety of options for financing. The end of the policy would be a sign that the economy is turning a corner.
Saeki, TMG: Shortly after the introduction of the negative interest rate policy by the Bank of Japan, a few things changed in local government bond markets, including the implementation of an absolute yield pricing method for bonds, rather than a spread-pricing method.
But regardless of the interest rate policy, TMG has continued to issue domestic bonds with an emphasis on raising funds through public offerings based on the monthly 10 year bond issues. Even if the negative interest rate policy ends, we do not expect any particular impact on TMG’s bond issue operations.
Ito, DBJ: The Bank of Japan’s negative interest rate policy has affected our bond investors’ activities and strategies, and the degree of that effect becomes more significant as time goes by. This policy created a demand among some investors to buy ‘safe’ bonds instead of keeping capital in deposits. It also created investor demand for alternatives to JGBs, which offer negative or very low yields.
This policy has also changed some investors’ maturity preferences, as well as their approach to factors such as credit risk, collateral conditions and risk-weighting. As a result, our investor base for each maturity product has experienced changes and it looks like this trend will continue as the Bank of Japan keeps the negative interest rate policy in place.
If the Bank of Japan altered this policy, the above changes would reverse, and as a result our investor base would change dramatically again. If that happens, we need to be careful and prudent to appropriately adapt to that change, and to modify our funding plans accordingly. That means everything: pricing, maturity allocation, and size.
We managed to issue at the same spread levels as municipalities in Japan.
If this negative interest rate policy ends, we are not expecting a drastic change in our funding plans, although we expect funding and lending levels to change somewhat.