Samurai bonds look to be fighting a losing battle
Samurai bonds have taken a big hit this year due to Covid-19, with deal volumes slumping by more than 75%. This has not only tested the resilience of the market — but also raised serious questions about its long-term prospects.
DCM bankers focusing on the Samurai bond market have not escaped the troubles of 2020. For the year to the end of August, Samurai issuance stood at the equivalent of $2.8bn from four deals — a big fall from the $11.9bn raised from 15 transactions by the same time last year, according to Dealogic data.
The decline in volumes is mainly because the home markets of potential issuers have been far more attractive this year when it comes to the cost of raising funds, say debt bankers in Tokyo.
In Europe, the European Central Bank has taken a step back from its earlier plans of reining in quantitative easing measures in the wake of the coronavirus. It launched an emergency programme in March to mitigate the economic impact of the pandemic, buying government bonds on looser terms than before. It expanded the programme in June — both in size and timeline — to €1.35tr of purchases until June 2021.
The US took similar unprecedented measures to prop up its economy, announcing $2.3tr in economic stimulus in April.
Together, these measures meant bond issuers in those regions have found favourable terms in the euro or dollar bond markets, giving them little reason to venture to Japanese yen.
“Issuers would have to pay up to raise a yen bond,” says Hiroshi Oikawa, a director and head of Japan DCM syndicate at Bank of America in Tokyo.
“So unless the yen-dollar basis swaps or the yen-euro basis swaps move, there is less possibility that issuers will want to tap the yen market.”
It is the same story for Asian issuers that had previously tested the Samurai bond market. They are now able to find better terms by selling dollar debt.
Masanori Kazama, an executive director in Nomura’s international DCM team, says that Korean issuers tend to come to the yen market regularly, but so far this year, they have avoided the currency, instead opting to sell dollar debt.
That’s not to say key deals haven’t come through, only that they have been limited. The Republic of Indonesia made its annual Samurai outing in July, taking ¥100bn ($930m) from a five-tranche transaction where pricing was more important than size.
Its ¥50.7bn three year portion was priced at a 1.13% coupon, the ¥24.3bn five year tranche pays 1.35%, the ¥10.1bn seven year notes 1.48% and the ¥13.4bn 10 year bonds 1.59%. The 1.8% 20 year tranche raised ¥1.5bn.
Malaysia’s Maybank ventured out in early February to raise ¥60.9bn from its Samurai, split between a three year, five year and a 10 year portion.
Two French issuers also tapped Samurai investors. Crédit Agricole bagged ¥122.1bn in May from a combination of two tranches of senior non-preferred bonds and one tranche of tier two debt.
France’s Caisse des Dépôts et Consignations, a public institution that debuted in the Samurai bond market in 2014, returned for a ¥20bn transaction in July.
Thibaud Grimard, deputy head of long-term funding at CDC, says the institution needed to hedge some of its assets in Japanese yen, which is why it tapped the Samurai market. On top of that, CDC had some yen redemptions in January and July — which meant the firm was not crippled with the need to swap the proceeds back into euros.
“We are keen to issue regularly in the domestic yen market to maintain our well-diversified investor base,” says Grimard.
Ahead of its deal, CDC held a call with investors, not only giving them an update on its credit fundamentals, but also discussing the impact of the coronavirus on the market and getting a feel for their favoured maturities.
In the end, CDC opted for a ¥20bn dual-tranche transaction, with tenors of two years and four years, split equally. Its deal had orders of ¥45bn, in line with its previous trades that were also oversubscribed. The 2022 portion was printed at a razor thin coupon of 0.05% and the 2024 at 0.07%.
There is a small pipeline ahead. The Philippines’ finance ministry, for one, is plotting a possible Samurai deal later this year, which could be worth about $1.35bn.
But otherwise, there is very little sign of more transactions, leading to a crisis of confidence in the future of the Samurai bond market among some DCM bankers.
Oikawa reckons issuers have little interest in the Samurai format now. Instead, they prefer to tap the yen bond market using Euroyen or global yen formats.
Euroyen bonds are yen deals issued in the Eurobond market by non-Japanese borrowers, while global yen bonds are denominated in yen but printed internationally. Unlike Samurai bonds, these deals are not registered with the Tokyo Stock Exchange and do not require the issuer to print their documents in Japanese. As a result, they are faster and easier to execute.
Oikawa says this shift in format is thanks to the fact that Japanese investors have “evolved in the past couple of years”.
“The deals don’t really have to be Samurai format anymore for Japanese investors to be able to invest in the international names,” he adds. “This means issuers have more flexibility around marketing and preparation, and Japanese investors don’t really have to look into the documents in Japanese. If it’s global yen or Euroyen bonds, they can look at the English documents and have their credit signed off for investment.”
Samurai bonds would require three to four months of preparation ahead of pricing, but issuers can get their Euroyen or global yen bonds ready to go in about a month, say bankers.
This more rapid execution, combined with the lack of a pricing differential between Samurai bonds and international yen deals, is making a Samurai deal less relevant.
It’s a similar story for the Pro-Bond market. International borrowers can tap this market, which gives them access to Japan’s domestic investor base but bars retail investors from taking a punt, for the many benefits it offers versus a Samurai outing. Issuers can disclose their documents in English and/or Japanese, allowing for easier execution.
But this market too is increasingly being shelved by international borrowers.
Oikawa says that in the past, investors needed the issuer or its bond to be listed on the Tokyo Pro-Bond market to invest. But as they become more sophisticated, they are not concerned about whether the note is listed on the Tokyo Pro-Bond market or not.
Bankers say that some issuers are also ready to ditch the additional paperwork that goes into executing a Pro-Bond in favour of an international yen transaction, dealing a blow to this format.
Euroyen in focus
That’s already been the case with a handful of deals this year. Take Swedbank for example. The Swedish bank printed a ¥21bn dual-tranche bond in June, marking its first public offering in the yen bond market, and offering yen investors a dash of variety. Its ¥10.3bn three year portion was printed at a coupon of 0.369%, while its ¥10.7bn 2025 note was sealed at 0.423%. These work out to 25bp over yen offer-side swaps and 40bp over swaps, respectively.
However, the borrower opted to diversify its investor base by opting for a Euroyen bond format. This was despite the fact that Swedbank had initially considered a Pro-bond in 2017, when it filed an information document in Japan. A deal never materialized however, as pricing was not competitive enough,
Swedbank revived the trade this year, opting to seal a Euroyen bond instead.
The US’s Berkshire Hathaway also tapped yen investors in April, taking ¥195.5bn in what was then the biggest bond offering by a foreign issuer in the Japanese currency since the Warren Buffett-backed firm made its debut in the market in September 2019.
Its move was to take advantage of still low spreads on yen bonds versus those in the international markets, say bankers.
Berkshire executed a seven-tranche transaction, with its longest maturity being a 40 year tenor that offered a 2% coupon. The shortest was a 2.99 year priced at 0.674%, shows Dealogic.
But the action is still not nearly enough for the yen bond market. In the year to the end of August, $3.5bn equivalent was raised from the global yen and euroyen markets through six deals, versus nearly $7.1bn from 13 deals in the same period last year.
“It always boils down to this question: is the Samurai, or generally the yen bond market, cost effective?” says Nomura’s Kazama. “That’s the big concern. Issuers want to save on costs and go for a longer duration, when all investors are looking for yield.”
Bankers are used to the zig and zag of bond issuance, with changing swap rates, asset-liability needs and interest rate expectations driving moves towards different currencies. They have reason to hope that the drop in yen issuance this year will not be a lasting change. But one thing is clear — in the near-term, there’s no reason for optimism.
“We have seen more diversity with the Swedbank deal, but when it comes to volumes this year, we won’t be anywhere close to last year’s volume,” says Kazama.