The Japanese investor has been a blessing for many issuers in the past two years. The Euro-MTN sector has flourished as they have moved to the international markets for higher yields. But many of these investors are restricted to the top-tier credits, leaving some borrowers out in the cold. MTNWeek asks three Japanese corporates how they see their market developing. Tatsushi Kyushima, assistant manager, financial department, Suntory Kunihiko Motokawa, head of treasury, Toshiba International Finance Ken Hirose, treasury manager, Toyota Financial Services How much of your yen funding is off your Euro-MTN facility? Kyushima: Sixteen per cent. It has risen just 1% from the same figure last year. Hirose: Approximately 13% of Toyota Financial Services' funding is in yen. The figure has increased over the last 12 months, reflecting increasing demand from institutional investors for structured Euro-MTNs. Motokawa: Most of our issuance is in yen. We have issued some notes in dollar, however we don't issue these frequently. How much do you fund in the domestic market? Motokawa: We have issued around ¥25 billion ($213.03 million) since April, following the start of the Japanese new fiscal year. Investors have fresh funds to place and are looking for borrowers. Investment trusts have sold especially well in Japan, after the return of the zero interest rate policy. Kyushima: Twenty per cent of our funding is in the domestic market, again a slight rise from 17% last year. In terms of coupons, we find that there is no difference between the MTN market and domestic markets. However, in terms of our all-in-cost, funding in the domestic market is more expensive. This is because when we fund in the domestic market there are many additional costs added on for financial agents such as the payment fee. Hirose: We fund ¥500 billion in the domestic market. As the economy weakens, the issuers' demand for funding has decreased. How has the uncertainty in the Japanese economy affected yen issuance off your Euro-MTN facility? Kyushima: For the last one to two years at least, the uncertainty in the Japanese economy has not affected our MTN issuance. Although the Japanese economy is sluggish and uncertain, both credit spreads and Japan premiums are remaining low. Motokawa: Prime minister Koizumi advised the Japanese to be patient for the next couple of years and allow him to go ahead with painful reforms. The inflow of cash is steady due to the stagnant spending. I believe the availability is still all right. Hirose: In contrast to the Japanese investors, we have found that demand from non-Japanese investors has been very weak. This has been due to the extremely low interest levels and a weak currency. How has Japanese investor confidence changed over the last two years? Hirose: While the investors suffer from less supply from the issuer, demand has been continuously strong both from institutional and retail investors for high credit notes. Motokawa: After the public money injection to Japanese banks, investors recovered their confidence. How have structures and maturities that Japanese investors look at changed over the last couple of years? Kyushima: Interest rates have been quite low lately, and this has had a clear impact on demand in the MTN market. Investors are seeking higher coupons by taking longer maturities. There is also a greater demand for structured notes. Hirose: The low interest level has led the investors, typically institutional investors, to show a high interest in various types of structured notes. This has allowed them to enjoy spread margins between long-term interest and short-term interest. Motokawa: The introduction of the mark-to-market accounting regulation decreased complicated structured notes and increased less than 12-month plain vanilla notes. In the case of callable notes, investor demand has moved to 10-year notes and longer, seeking a higher coupon. How do you market your name outside Japan? Kyushima: It does not make any sense for us to market our name outside Japan, since our credit ratings by foreign rating agencies are much lower than those given by Japanese agencies. As long as we can continue to fund enough money from Japanese investors, we would not change this attitude. Hirose: Toyota's debt marketing has historically been conducted by each issuing entity on a local basis. To date, most of the investor relations activities have been handled by Toyota Motor Credit Corporation, the most frequent issuer among the group. In Japan not many initiatives have been undertaken due to our low funding requirement. Since the establishment of Toyota Financial Services Corporation, however, we have established a globally consistent and coordinated approach between group entities in respect of the debt-marketing activities of Toyota. Motokawa: We don't have to sell our notes to non-Japanese investors at the moment. How much do Japanese investors rely on ratings? Motokawa: Japanese investors use credit ratings as their basic investment standard, but they also consider names as well as ratings. We take advantage of this because the name of Toshiba is very popular for household products. Kyushima: I would say that Japanese investors rely on credit ratings the most. The next criterion to pick up an issuer would be name recognition followed by industry category. Hirose: Although the significance of credit ratings remains, the Japanese market has not been successful in implementing and reflecting appropriate levels of credit spreads in the curve. What is your funding strategy for the next 12 months? Hirose: Our strategy is to extract the benefit of having strong credit ratings and maintain our reputation in the capital markets. To achieve this we aim to issue according to investor demand, price transactions to provide fair value to investors, provide potential for secondary market activity and continually focus on investor development. We also aim to diversify funding and access all available markets. Kyushima: We will try to lower our all-in cost by taking structured notes and converting them into Libor-based floating rates. We do not mind issuing in small amounts or issuing very complicated structured notes. We are shifting our funding source from traditional bank borrowing to issuing notes in the market. Motokawa: We would like to issue notes continuously for the next 12 months. What is the greatest challenge the Japanese market has to face in 2001? Kyushima: We are a little afraid that investors might keep away from structured notes because of the mark-to-market accounting rules and regulations. Although nominal coupons for the first few years are high, their mark-to-market value is sometimes negative. Hirose: Both structural reform and the global economic slowdown are two difficulties that Japan faces in the coming year. The rating downgrades of Japan and increasing use of credit, resulting in a widening of Japanese credit spreads and the Japanese premium increase are challenges that the Japanese market has to contend with. Motokawa: The IT and communication sector have really suffered recently. Further restructuring is required to maintain their credit ratings.
September 21, 2001
