Japanese investors are driving the market in 2000, despite statistics suggesting the country is still in recession. Issuance in yen hit record levels as non-syndicated trades reached $28 billion for the first quarter. And buyers have increased their appetite for credit. But though issuers are rushing to mop up Japanese cash, many are frustrated that pending accounting rules in Japan mean the majority of demand is for short-dated paper. UK corporate, Scottish & Newcastle, has issued 15 yen notes this year, although nine have a one-year life or less. Alan Dick, assistant group treasurer at the company, insists there are long-term buyers out there, it just takes more work to find them. He says: "We would prefer to do longer-dated trades. Although the yen deals we issued in January and February all had one-year maturities, we've recently been able to find investors wanting to buy in the three- to five-year range. We're keen for our dealers to concentrate on finding more investors of this type for us." When spreads blew out in Japan during the crisis of 1998, Japanese money funds were able to buy domestic names cheaply. But as economic recovery has gained momentum this is no longer the case and dealers report a growing interest from buyers to hold European credits, which in many cases are cheaper than their Japanese peers. Klaus Svendsen, vice-president, at Morgan Stanley Dean Witter, explains: "The money has been there all the time, investors are just starting to divert it into European credits now. As long as there is a decent relation between risk and yield, investors are willing to get a line for an issuer if they don't have it." But for longer maturities some borrowers might not be flexible on price. Svendsen continues: "The demand for five- to 10-year trades is there, but it is difficult to get at the right spreads for single-A European corporates. I think there will have to be some changes in the Euromarket. US issuers don't get structured notes at the kind of levels European corporates demand. Borrowers are going to have to live with wider spreads if they want to achieve longer maturities." And the problem will grow when the Japanese accounting rules are introduced next year. Institutional investors will have to mark-to-market bonds of over one year giving them even less incentive to buy long-dated notes. In the first quarter of 1999 non-syndicated yen issuance for notes of one year or less was $3.36 billion, compared to $10.74 billion in the first quarter of 2000. Gavin Eddy, executive director and head of Euro-MTNs, at Warburg Dillon Read (WDR), believes marking trades to market is making investors wary of long-dated notes. "It's had a big impact on the market already and the full implications are not yet clear. Japanese investors are taking it very seriously and that is being reflected in what they're buying. Business in the long-end has been particularly affected with investors shying away from structured trades. Instead we've seen a growth in vanilla credit business," he says. But for many European corporates the shift towards lower credits is welcomed. Simon Lane, director of corporate finance at Safeway, was surprised by how quickly Japanese investors snapped up its paper. He says: "For single-A credits setting the right pricing levels there is a good deal of demand out of Japan at the moment. We were very pleased with the quick response we got from that market." The drop in structured yen notes has been dramatic as investors don't want to mark complex trades to market. From January 1 to April 31 1999, structured deals made up 16total non-syndicated yen trades. During the same period this year that fell to 7according to MTNWare. Yet the head of Euro-MTNs at a top Japanese house, doesn't believe that with a zero interest rate Japanese investors will stay away from structures. He says: "Plain vanilla is easy to calculate and record for accounting purposes. But simple structures, such as callables and the CMS will continue to be popular. They are easy to understand and measure." But possibly it is not just Japanese investors adding to the surge of yen trades. Barclays Capital caused a stir last month when it was sole dealer off a handful of large-sized, non-syndicated yen deals, including a ¥85 billion ($806 million) note for KfW. This is 40 times larger than the average size of non-syndicated yen deals in 1999. Dealers have been speculating on the identity of the investor, rumoured to be a Barclays-owned fund, since no deals have turned up in the secondary market. Barclays Capital has repeatedly refused to comment, saying they have no need to justify the nature of their trades or investors. Dealers predict subtle changes in investors' choice of yen notes, but say that liquidity should remain high with so much cash flowing and short-dated notes rolling over. Yen looks set to remain number one for some time. Eddy, at WDR, says: "The volumes are set to continue. However we expect some shift from fixed rate notes into FRNs. It's looking likely that the zero interest rate will end during the second half of this year, which combined with anticipated yen strengthening will start driving investors in new directions."
August 04, 2000
