The strong case for Samurai
The Samurai market has a compelling story for the long term, bankers believe, thanks to a combination of low yields and a lack of alternative paper for local investors. Japanese regulators are also keen to open up the market to more issuers and investors.
Bankers and issuers believe that in the short term, for the Samurai market the impact of the Bank of Japan’s policy announcement at the start of April will be mixed. The good news is that it is likely to create more demand among Japanese institutional investors for foreign bonds, says Kazuhide Tanaka, director and head of long term funding for Japan at Rabobank, which is the most prolific and regular borrower in the Samurai market.
“From our perspective the key feature of Abenomics is that the Bank of Japan’s asset purchase programme is going to be focused on Japanese credits, which will drive the yields on those credits tighter and tighter,” says Tanaka. “That will make highly rated foreign credits, such as Rabobank, much more attractive to Japanese institutional investors on a relative value basis.” That will be especially beneficial for Rabobank, which has been a stalwart of the Samurai market and is committed to issuing on a regular basis and maintaining a consistent presence throughout the yield curve.
The less positive news, say bankers, is that the BoJ’s April announcement sent the basis swap into paroxysms of volatility. In the immediate aftermath, that volatility ruled out any issuance in yen, given international issuers’ requirement to swap proceeds into dollars. “As long as there is extreme interest rate and currency volatility, it is hard to contemplate any new issuance in the public yen market,” one commentator says, adding, however, that he was confident that the is was a short-lived response to a sea-change in economic policy. “We saw the basis move by as much as 10bp-15bp in the five year maturity from one day to the next. That caught a number of basis swap traders off their guard. But I believe we will see a return to normalcy soon.”
Hiroyuki Kinoshita, head of international debt syndicate at SMBC Nikko in Tokyo, says the volatile basis swap made it more difficult for borrowers, but conditions have since stabilised. “Abenomics has had a positive impact as investors are being crowded out of the domestic market and thus more able to accept tightly priced new issues from foreign borrowers.”
In one respect, the timing of the extreme volatility in the basis swap was fortuitous for the Samurai market, which traditionally is quiet towards the end of the Japanese fiscal year, so bankers would not have expected much issuance anyway.
At Mizuho in London, executive director of European primary debt markets, Richard Tarn, says the dearth of issuance in the first quarter of 2013 did not reflect a shortage of demand among Japanese investors. Issuance in the early part of the year has recently been driven by Australian borrowers, but they have been absent from the market for the last year.
“The first quarter is generally not a time of year that works well for Samurai issuance from Europe, because so many European borrowers have their year end in December and release their annual results in Q1,” he explains. “As borrowers would then have to prepare statements in Japanese if they were issuing in the Samurai market, the first quarter isn’t an optimal window for European borrowers from a disclosure perspective.”
Leaving aside the short term volatility, bankers say the story for the long term development of the market remains compelling, both from a demand and supply perspective.
Underpinning long term demand for Samurai bonds will be a continued combination of low yields and a shortage of alternatives for Japanese investors in the local credit market. Bankers believe Abenomics will encourage a rise in corporate bond issuance, with Softbank’s huge, recently announced ¥400bn ($3.9bn) retail-targeted issue the clearest example of Japanese corporates’ increased use of the capital market. “Issuance volume in the bond market has been stable,” says Koh Kawana, head of global fixed income capital markets at SMBC Nikko in Tokyo. “But we believe that as Japanese companies increase their investment locally and internationally we will see a rise in corporate bond issuance.”
Others caution that opportunities for credit investors in Japan will remain scarce. “Developing a high yield market in Japan will be a challenge because the loan to deposit ratio at Japanese banks is so low,” says Shintaro Mori, co-head of capital markets and treasury solutions at Deutsche Securities in Tokyo. “It is between 60%-70% at most banks and even lower at some of the regionals. That means the banks are prepared to lend money to companies rated triple-B by Japanese agencies, which is equivalent to double-B at international agencies, at fairly skinny spreads. The bond market can’t compete with these levels.”
The continued shortage of alternatives will ensure that demand for Samurais remains robust, say bankers. “The message we’ve been putting across to issuers since the policy change announcement is that low yields in the domestic market should encourage investors to look more favourably at foreign credits and to look for opportunities further down the maturity curve,” says Vince Purton, head of capital markets at Daiwa Capital Markets in London. “With foreign credits offering investors more incremental bang for their buck, we think there will be as much supply in 2013-14 as there was in 2012-13, if not more.”
There seems to be little doubt that issuers will continue to be attracted to the Samurai market if the basis swap makes the all-in costs competitive. For many of the best-rated SSA borrowers, however, the market is likely to remain more or less closed, unless they have a requirement for yen. Take the example of an issuer like Sweden’s SEK, which is very popular among Japanese investors in the private placement and Uridashi markets.
Petra Mellor, director at SEK in Stockholm, says that although SEK issued a five year Samurai in 2009, she doubts that market conditions will allow the Swedish borrower to return soon. “Unfortunately at the moment, all-in pricing makes the Samurai market a little too expensive compared with other core currencies,” she says.
“This is not to say that we don’t monitor conditions in the Samurai market closely,” she adds. “We like to match-fund as much as we can in terms of maturities and currencies, so if we have Japanese lending — which we do from time to time — we would ideally like to raise funds in yen and lend in yen. For this kind of activity, a plain vanilla Samurai is a much more convenient funding instrument than a structured Uridashi.”
While the basis swap may not work for some of the best-rated SSA borrowers, it is not necessarily the decisive factor for other borrowers weighing up their global funding options. “Some issuers looking at the Samurai market are monitoring the basis swap very closely,” says Kinoshita at SMBC Nikko. “However, the majority are looking at the market with a much longer term perspective as an important source of investor diversification. Of course they are comparing their yen levels with the euro and dollar secondary curves, but most issuers in the Samurai market are repeat borrowers which have made a long term commitment to this market.”
Sam Amalou, head of debt capital markets at SMBC Nikko in London, agrees. “Different issuers have varying levels of tolerance in terms of their willingness to pay a premium to access a new investor base,” he says. “For example, some may be under more pressure than others to demonstrate to the ratings agencies that they have access to a wide range of funding sources. Others may benchmark themselves against their peers, and decide that if those peers are paying a 10bp-20bp premium to access the market, it is reasonable for them to pay the same.”
While issuers may be willing to pay up to access the Japanese investor base, by the same token local investors may be prepared to forego some yield to buy credits they have become comfortable with over a number of years. Many of the most active institutional buyers, meanwhile, are sufficiently sophisticated to be able to identify value in Samurai pricing relative to where the issuer trades in dollars and euros.
The interplay between these trends is what allowed Rabobank to price its recent five year Samurai at yen swaps plus 14bp when its previous issue, last October, was offered at 40bp over. “One of the main lessons we’ve learned recently is that Japanese investors have become prepared to adjust the levels at which they’re prepared to buy,” says Steve Apted, head of debt syndicate at SMBC Nikko Capital Markets in London. “The pricing on Rabo’s recent Samurai did represent a very substantial tightening, but that was a fair reflection of the re-pricing of its euro curve.”
Amalou adds that it was also a function of increased confidence about the prospects for the banking sector, both among issuers and investors. “For bank issuers, 2013 is completely different to 2012,” he says. “Last year we were still seeing new issue premiums of between 10bp-20bp which banks regarded as an acceptable price to pay to access liquidity. This year they are much more sensitive to price.”
That may be. But bankers acknowledge that the pricing of Rabo’s recent Samurai, which Amalou says was inside its euro curve in three years and flat to it in the five year tranche, was tight enough to scare some orders away.
“We did see some orders dropping out of the book or being scaled back when we tightened price guidance from 14bp-16bp to 14bp-15bp,” he says. “Nevertheless, we still had a very granular order book, and even allowing for some order duplication it’s safe to say that we had well over 100 orders.”
Some accounts have yet to adjust to the new realities in spreads, says Tarn at Mizuho. “But it was notable that a number of pension funds, asset managers and insurance companies, among other core institutions, have clearly made that adjustment,” he says. “The fact that Rabo was able to print over ¥100bn at spreads of 10bp and 14bp over yen swaps respectively in the three and five tear tranches shows you the depth of demand.”
Further evidence of this strong demand, says Tarn, was investors’ response to the ¥91.2bn four tranche issue from Nordea at the end of May. Tarn says that in spite of the volatile backdrop during the marketing period, Nordea achieved very tight pricing on all tranches, breaking a key psychological barrier by pricing the shorter tranche at single-digit spread.
Strength of demand may reflect that the investor base for Samurai bonds continues to expand. “Last year we saw a number of new investors coming into the market, including some of the regional investors,” says Kinoshita at SMBC Nikko.
“This trend is continuing because it is so difficult to earn yield in the domestic market.”
At the same time, existing investors are looking to broaden their horizons in the Samurai market. “On our recent visits to core Samurai investors many have indicated that they are intending to expand their scope to new geographical regions,” adds Junichi Sekitani, vice president of international debt capital markets at SMBC Nikko in Tokyo. “Now they are telling us that they would welcome new credits.”
In terms of the potential growth of the investor base, bankers do not expect this to extend to the BoJ adding foreign bond issues to its asset-purchasing repertoire, which might be viewed as politically unacceptable.
Another option for expanding the investor base would be for more Samurai bonds to be marketed to investors outside Japan, although as Kinoshita says, issuers have mixed feelings about selling yen bonds to non-Japanese accounts. Those whose principal purpose in the yen market is to diversify their investor base by reaching out to a granular group of Japanese institutions insist that the distribution effort is concentrated in Japan.
“However, we do sometimes place Samurai bonds with overseas investors if demand is strong and the issuer does not mind about where the bonds are distributed,” says Kinoshita.
What’s in the pipeline?
There are mixed signals about the issuance pipeline in the Samurai market. Amalou hopes that more first-time borrowers will access the market from the FIG, sovereign, agency and even corporate sectors in 2013. But he also cautions that the absence of the Australian banks, twinned with continued deleveraging in the global banking industry, may cause volumes in the Samurai market to drop by as much as 20% this year.
Meanwhile issuance by Korean banks, also important Samurai borrowers, may be subject to political uncertainty prompted by sabre-rattling on the Korean peninsula. “Some investors are sensitive about headlines coming out of Korea, which sometimes makes it difficult for Korean borrowers to access the yen market, although the general consensus is that concerns about North Korea will be short-lived,” says Kinoshita at SMBC Nikko.
With question marks over the outlook for FIG supply, bankers will hope for more Samurai issuance from other sources, such as corporates. In calendar 2012, Renault made the most of being the main representative of the elusive corporate sector in the Samurai market, raising a record ¥62.4bn in the year through two similarly sized two year issues. The first, in June, was a ¥32.2bn issue, which was followed up with a ¥30.1bn transaction in December. Beyond Renault, however, which has a natural need for yen, there will be few obvious candidates for Samurai issuance as long as the basis swap remains in negative territory.
One area of the Samurai market that has had some welcome diversification has been issuance of bonds guaranteed by Japan’s Bank for International Co-Operation (JBIC). In terms of geographical diversification, two JBIC-guaranteed issues were especially significant in 2012. These were a ¥25bn trade from Tunisia in December and, earlier in the year, an ¥85bn issue from Qatar Petroleum.
“The Qatar transaction was important because it encouraged a number of investors to open lines for Middle Eastern borrowers for the first time,” says Sekitani at SMBC Nikko.
Japanese regulators are clearly keen for a more diversified range of issuers to access the Samurai market, say bankers. This is why a recent amendment to the Financial Instruments and Exchange Act has expanded the scope of English language disclosure to allow offering as well as continuous disclosure documents to be in English. So far, however, there has been muted interest in this concession among debt issuers.
Another potential source of increased diversification in the yen-denominated market for overseas issuers is the Tokyo Pro-Bond market. To date, the only issuer in this market has been the Dutch bank, ING (see page 23), but Barclays, for one, which led the inaugural ING transactions, expects more will follow.
“When we’re advising borrowers which market to access, we would probably marginally favour the Pro-Bond market,” says Kenji Setogawa, a director at Barclays in Tokyo. “The universe of Samurai issuers is still very limited, which is a problem for the yen market compared with dollars, for example. One of the reasons for this is that the barriers to entry for borrowers are so high because of the requirement for Japanese language disclosure. But Japanese investors would love to see more diversified supply, so while we continue to support the Samurai space we would like to see an alternative market develop.”
Setogawa is cautiously optimistic that there will be more issuance in the Tokyo Pro-Bond market. “There is plenty of interest, but continued deleveraging in the FIG sector means that issuers are focusing on core currencies,” he says.
Basis swap survives buffeting
|Yong Xu, analyst at SMBC Capital Markets in New York, says that in the few days after the Bank of Japan’s April 4 bond buying announcement, the Japanese yen/US dollar basis widened by 12bp, while the yen/euro basis swap widened by 15bp. Meanwhile volumes doubled. Notional volumes of about $700m a day shot up to $1.4bn immediately after the BoJ’s decisive policy board meeting, adds Xu.
This made yen issuance less attractive for issuers swapping proceeds back into dollars or euros, although the absolute level of the cross-currency basis was perhaps less of a deterrent for issuers than the dizzying volatility in the market.
The widening of the basis swap in April provided a good, if extreme, illustration of the main determinant of the cross-currency basis, which is the relative weight of demand for currencies. “The key driver of the dollar-yen basis is demand for US dollars, especially at the shorter end of the curve, although the belly and the longer end can also be affected by other factors such as relative credit spreads,” Xu explains.
“Because the main driver of the basis is cross-market currency flows, borrowers in the capital market monitor cross-market issuance volumes very closely,” he adds. “Whenever there is a big Samurai or Euroyen issue, for example, the basis swap will widen sharply. Even though we have seen limited issuance of Samurai bonds this year, the basis has remained in deeply negative territory because market participants are anticipating a rise in flows later this year. This is why we have seen a sharply inverted basis swap curve.” In the absence of a parallel increase in demand for dollars swapped back into yen, balancing the flows of yen swapped back into dollars, the basis will remain in this negative territory.
In the aftermath of the BoJ announcement, however, it was not projected flows of Samurai issuance that pushed the cross-currency basis wider. As Xu says, April’s sharp moves had more to do with the expectation that the BoJ’s policy shift would encourage investors to increase exposure to overseas markets, which in turn would trigger large-scale buying of dollars and euros by Japanese institutions.
Since its initial lurch, the volatility in the cross-currency swap has eased, and some of its widening has been reversed. Xu says that between April 9 and mid-May, the five-year yen/dollar basis narrowed from minus 69bp to minus 62bp, while the yen/euro swap recovered from minus 46b to 40bp.
In other words, says Xu, the basis recovered about half of the widening that was posted in the week after the BoJ’s policy board meeting. This has probably brought the basis to the sort of levels at which it is likely to trade over the foreseeable future. “We believe that after this latest round of volatility the basis will trade in a range-bound environment,” says Xu. “So we may see the five-year yen/dollar basis move within a range of minus 70bp to minus 50bp, with the yen/euro basis staying in a minus 45bp to minus 25bp range in the near term.”
Two conflicting forces will combine to keep the cross-currency basis within this range, thinks Xu. “The first is the global macro-economic outlook, which will continue to improve, thanks to easing measures from central banks,” says Xu. “The BoJ’s policies will be part of this global trend, which will be supportive of funding in US dollars by Japanese institutions. This is a positive factor for the yen/dollar basis.”
“However, the negative impact will be the continued shift in asset allocation by Japanese institutions into foreign bonds in response to low but recently volatile JGB yields,” says Xu.
Overseas borrowers in the Samurai market will welcome this relative stability in the basis swap, along with the initiatives to enhance the transparency of the cross-currency basis. Xu points out that the recent requirement under the Dodd-Frank Act for US swap dealers to report the trades is a healthy development, because it allows investors and other market participants to view trading activity on a quasi-real time basis. “This is very positive because it will increase the transparency of the OTC derivatives market,” says Xu.
Persistence pays off for Société Générale
For sheer never-say-die persistence in the international capital market, few issuers can match Société Générale’s determination to bring its debut Samurai bond.
The French bank filed the documentation clearing the way for its inaugural deal in September 2008 and was set to press the button when the collapse of Lehman Brothers brought the new issue market to an abrupt standstill.
Undaunted, SG refiled in June 2011, only to be frustrated again when Moody’s swung the axe over its ratings on all the French banks. Stéphane Landon, head of group treasury and ALM at SG’s Paris headquarters, says the postponement of the deal in the summer of 2011 was disappointing because it came as the bank was enjoying considerable success in diversifying its global investor base. “The background to our Samurai transaction is that it was part of our desire to diversify our investor base, just as we had been doing in the US dollar market,” he says.
Third time lucky, SG eventually made its Samurai debut in November 2012, printing a ¥70bn transaction made up of a ¥23.8bn two year tranche priced at 60bp over yen swaps, a ¥39.7bn three year bond at 70bp over, and a small ¥6.5bn five year tranche at a 75bp spread.
Mitsubishi UFJ Morgan Stanley, Nomura and SMBC Nikko led the deal, which was well worth the four year wait, although the timing — once again — was unfortunate, as it came soon after Moody’s had downgraded France from Aaa to Aa1. At the time, the agency had warned that French banks, with their exposure to the weaker peripheral economies of the eurozone, remained “vulnerable to a further deepening of the crisis”.
Landon says the strong demand for SG’s Samurai was a testament to the willingness of the Japanese investor base to recognise that the French downgrade had been widely anticipated since February 2012, when the sovereign rating had been put on negative outlook. “The strength of demand across all three tranches showed that Japanese investors did not allow the French downgrade to influence their view of the SG credit,” says Landon. “The Samurai was part of a very successful year of long-term funding for SG in which we were able to raise about €27bn in dollars, euros and yen.”
While the strength of demand for the SG deal allowed the bank to raise more than the originally planned minimum of ¥50bn, Landon says that it is more important for SG to become a regular Samurai issuer, in a range of maturities, than to maximise the size of any individual deal. By the same token, while SG will only issue if the basis swap allows it to fund at competitive levels in yen, arbitrage is not the sole aim of its funding in the Japanese market.
“The objective is to position SG as a repeat borrower in the yen market to further diversify our investor base,” says Landon. “That may mean we will need to pay a small premium, but it has to be limited. We need to ensure our funding costs remain competitive compared with other markets.”
Aside from setting a reference point for itself, SG’s inaugural yen issue also provided a useful benchmark for other French banks. Soon after the SG trade, BPCE issued a debut Samurai, printing a similarly sized and priced transaction via Daiwa, Natixis and Nomura. The bulk of this ¥67.2bn three-tranche issue was accounted for by the ¥52.2bn three year tranche priced at 70bp over yen swaps.Landon was encouraged to see BPCE bring more diversity to the Samurai market. “It demonstrates the capacity of French borrowers to draw liquidity from a wide range of sources,” he says. “It was encouraging to see that there was appetite for French risk and I think we’ll see other issues from France over the coming months.”
Five good years for Rabo
|Rabobank issued its maiden Samurai bond, a ¥160.3bn three-tranche issue led by Daiwa, Mizuho and UBS, in June 2008.
The maturing of this transaction on June 13 was important, however, not because it marked a minor anniversary in the yen market. For Rabobank, which with close to ¥850bn outstanding is comfortably the largest Samurai issuer, the redemption of its inaugural bond is important because it helps to recycle demand from investors who may be reaching their limits on the Rabo name.
Sustaining that demand is essential, given the importance of the Japanese investor to the Dutch bank’s overall funding strategy. According to Kazuhide Tanaka, head of long term funding at Rabobank in Tokyo, last year the bank raised ¥280bn, or about $2.8bn, out of a total global funding programme of around $39bn. Throw in the $1bn or so that Rabo generally raises each year in the Uridashi market, and Japanese institutional and retail investors combined account for roughly 10% of the bank’s total annual funding.
Tanaka expects this year’s proportion of Japan-targeted funding to remain at about the same level. Rabo’s Samurai issuance, however, is likely to fall in line with a decrease in its total funding requirement from around €30bn in 2012 to closer to €20bn in 2013. “Between 2009 and 2011, Rabo was issuing more than €40bn a year, largely to bring our net stable funding ratio into line with the Basel III requirements,” says Tanaka. “That has now been completed, and we now need between €20bn-€30bn a year to finance our balance sheet.”
That is still a chunky number. Not that there was any indication of investor fatigue with the credit when Rabo returned to the market with its first Samurai of this fiscal year, which was a four-tranche ¥101.5bn trade launched in May. This maintained Rabo’s track record of re-opening the Samurai market after a barren period in the primary market. In November 2011, it was Rabo that re-opened the market after a four-month closure reflecting investors’ jitters over the intensification of the eurozone crisis in the third quarter of 2011.
As Tanaka says, Japanese investors’ concerns about a eurozone break-up have receded, but that is not to say that they are entirely relaxed about the prospects for European banks — even for those at the core of the EU. “Investors don’t have the same worries that they had last year about the shaking of Europe’s foundations,” says Tanaka. “But they did ask about the recession in the Netherlands and the outlook for the Dutch housing market.”
Those uncertainties did not dampen demand for May’s issue, the razor-thin pricing of which provides graphic evidence of how far Rabo has come in building a large and loyal investor base in Japan. Pricing on the five year fixed tranche in May was just 14bp over yen swaps. That, says Tanaka, compares with yen swaps plus 67bp on its five year fixed rate Samurai in May 2012, and with plus 40bp for an issue with the same maturity in October.
For some investors who had bought Rabo at 67bp over swaps the previous year, price talk of 14bp-16bp over was a deal-breaker. But Tanaka said that most accepted that the pricing was a function of the change in global credit conditions over the last 12 months. “This pricing was a reflection of the tightening of our spreads in Europe, which like all investment grade spreads have come in dramatically this year, so it was not a surprise,” he says.
“I try to meet new investors, at some of the regional or Shinkin banks for example, whenever I can,” says Tanaka. “But the bulk of demand tends to come from repeat investors that have been happy to buy into our credit ever since we issued our first Samurai in 2008.