Retail buyers embrace risk
With lower rates and tighter spreads, Uridashi investors are having to take more risk through longer tenors or by moving into new currencies. Japanese retail investors still have money to invest and their risk tolerance is rising too.
Issuers don’t believe that Japan’s new monetary strategy will lead to any marked change in overall volumes in the Uridashi market, where demand among Japanese retail investors will remain robust and may even strengthen. But leading borrowers report a change in investor preferences since last year’s election and the sharp rally that has followed in the equity market.
“We have seen a pick-up in demand for equity-linked Uridashi, and there has also been more FX-linked flow because of the weakening of the yen,” says Petra Mellor, director, funding and treasury, at SEK in Stockholm. “On the other hand, we have also seen an increase in redemptions triggered by the rise in the Nikkei index. However, we don’t expect our total issuance volumes in the Uridashi market to change much. In the past we have done roughly 25% of our annual funding in Japan, and our issuance in the first quarter of 2013 was in line with previous years.”
Bankers agree with this assessment. “Although we’ve seen more early redemptions being triggered, the strength of the stock market has also attracted more investors to Nikkei-linked Uridashi structures,” says Hiroyuki Kinoshita, head of international debt syndicate at SMBC Nikko in Tokyo.
“But the main trend is that with rates lower and new issue spreads tighter, investors are having to take more risk either in terms of tenor or by expanding into new currencies.” Specifically, he says, demand has been growing for notes in currencies such as Turkish lire, Russian roubles and Mexican pesos.
There has also been an increase recently in Uridashi issuance from emerging market borrowers. Exim Bank launched the first transaction from an Indian issuer in 2012, for example, while in February National Bank of Abu Dhabi (NBAD) became the first issuer from the Middle East and North Africa when it printed a $16.6m 15 year transaction.
It is Scandinavian borrowers, however, that have been the most consistent and prolific issuers in the Japanese retail market. SEK’s Uridashi issuance mirrors the broader commitment that Nordic borrowers have maintained towards accessing the Japanese retail investor. Kommunekredit of Denmark, for example, raised 21% of its total funding in 2012 in Japan, which is more than it raised in Europe (13%) and Denmark (7%) combined.
Among other triple-A European SSA borrowers, KfW also remains committed to the Uridashi market, albeit only in structured format. “The BoJ announcement may have an impact on the vanilla market because it apparently creates volatility,” says Alexander Liebethal, head of new issues/structured notes and private placements at KfW in Frankfurt. “That won’t have any impact on our issuance into Japan. We have been sidelined in the plain vanilla segment of the Uridashi market for some while because yield levels in that market are very low. As long as investors want a combination of a platinum credit and yield enhancement the vanilla market in yen will remain closed to KfW.”
However, the opposite is true in the market for structured notes, Liebethal adds. “Demand in that market will remain strong from investors who appreciate the creditworthiness of KfW and the yield pick-up provided by currency or equity-linked structures. I believe we will see a comparable flow in this market in 2013 to what we saw last year.”
It remains to be seen if the sharp correction in the Japanese equity market at the end of May will affect the Uridashi market. In recent months, however, there have been clear indications that Japanese retail investors’ risk tolerance has been on the rise. “Investors who are still really bullish on the Nikkei are looking to buy equities directly, rather than via structured notes, because that is where you can capture the upside most efficiently,” says Richard Tarn, executive director, European primary debt markets, at Mizuho.
“However, following the large-scale early redemptions triggered by recent sharp equity and FX market moves, there is still a large amount of liquidity sitting on the sidelines, in mutual funds and bank accounts,” he adds. “So there is still scope for a pick-up in the reinvestment rate once investors have had a chance to take stock of things.”
Others say there is growing demand in the Uridashi market for notes linked to single stocks rather than to indices. While borrowers have been offering notes linked to single Japanese stocks for a while, banks such as Barclays and Deutsche are reported to have sold dollar-denominated Uridashis linked to individual US stocks.
KBN goes the extra mile to stay popular
|Another day, another Uridashi. In 2012, according to its head of funding, Thomas Møller, Norway’s Kommunalbanken printed 323 Uridashi trades, raising a total of about $6.6bn, or about 38% of its total funding for the year.
In terms of the number of issues, this year’s run rate is in line with 2012’s. By late May, KBN had printed 147 trades, raising $3.3bn, which is about 20% of its total issuance this year. This suggests that Uridashi issuance by KBN as a percentage of total funding slowed down in the first half of 2013, but only, says Møller, due to markedly higher total funding activity compared to the same period in 2012. “This year, we expect the Uridashi market to account for about 25%-30% of our funding, which is down from last year’s 38% but in nominal amounts is about the same as 2012,” says Møller.
Using the Uridashi market for roughly a quarter of its 2013 funding programme of between $20bn-$22bn is broadly in line with KBN’s plan for this year, which was to raise between 30%-45% of its total funding in retail markets. Of the balance, 25%-30% will be in benchmarks, 15%-30% in institutional niche currencies, and 10%-30% in private placements.
Møller says the reason why KBN, like other Nordic borrowers, is so popular with Japanese retail investors is not clear-cut. “First, we’ve had a presence in the market for many years, during which time Japanese investors have become very comfortable with highly-rated Scandinavian credits,” he says.
“Second, Nordic issuers perhaps have rather dynamic and innovative funding programmes, and are prepared to go the extra mile to accommodate Uridashi structures,” Møller adds. “Issuing in this market does require extra investments and work in terms of software, risk management and processing.”
Even compared to its Nordic peers, however, KBN is able to offer a gold-plated credit profile. Norway’s accumulated budget surpluses, of about 145% of GDP, means that it issues no foreign currency debt. As a result, KBN describes itself as “the closest proxy to Norwegian sovereign debt available in the international capital markets today”.
Throw in the alchemy of a structure linked to local or international equity indices or FX rates, and the result is a high rock-solid credit offering an irresistible pick-up for yield starved retail investors.
Of last year’s issuance, according to Møller, $4.5bn, or close to 70%, was in equity-linked notes. “The focus of the investor is generally on the added risk feature and avoiding credit risk, which is why we have consistently been able to offer an attractive alternative to Uridashi investors,” he says.
KBN is also well-regarded as an innovative Uridashi borrower. Witness its commitment to the issuance of Clean Energy Bonds, which is part of the Green Lending programme it established in May 2010, when it launched its first “themed” Uridashi. It returned to the market in March 2011 with a Clean Energy Uridashi, the proceeds of which were used to finance Norwegian municipal initiatives to reduce climate change. Led by HSBC, this bond was offered to investors in five currencies — Australian dollar, Brazilian real, Indian rupee and South African rand, as well as Japanese yen.
Even a borrower like KBN, which is based outside the eurozone, has not been entirely immune from credit concerns. When Eksportfinans of Norway was abruptly downgraded to junk status in November 2011, all regular Nordic borrowers in the Japanese market needed to spend some time reassuring local investors that they would not be following suit. “The impact of Eksportfinans was marginal,” says Møller. “For a short while in December 2011 there was some general confusion in the market but the investor base remained constructive and was able to grasp the clear difference between Eksportfinans and other agency issuers.”
Møller says he is comfortable with the large share of funding KBN generates from Japan. “Of course there are limits to how much we can do in any single market, but we are comfortable with our current presence in Japan, which is less than it was a couple of years ago,” he says. “There are plenty of other markets which we haven’t sourced yet which we could fall back on if there were a marked decline in demand among Uridashi investors, but obviously we hope to continue the very successful programme we have in Japan.”
One funding option that does not look viable at present to KBN on an all-in basis is the Samurai market. “The Samurai market looked like a competitive source of funding for a short time in 2009,” says Møller. “We had prepared all the documentation and filing for a deal and we were ready to pull the trigger when the basis swap once again moved against us. The Samurai market is one that we continue to monitor loosely, but it has to offer competitive levels versus the dollar market, which is our reference, and it hasn’t done so for years.”