Euroweek Japan report, September 2013: samurai roundtable

Euroweek Japan report, September 2013

Participants
Dennis Haring, Vice president, Long term funding, bank treasury, ING, Amsterdam

Louise Bergström, Head of investor relations, SBAB, Stockholm

Lauri Iloniemi, Senior vice president, head of group funding, Pohjola, Helsinki

Ola Littorin, First vice president, head of long term funding, Nordea Bank, Stockholm

Nadine Fedon, Global head of funding, Financial management division, Credit Agricole, Paris

Kazuhide Tanaka, Head of long-term funding – Japan, Rabobank, Tokyo

Sam Amalou, Managing director, head of debt capital markets, SMBC Nikko Capital Markets, London

Vince Purton, Managing director, head of debt capital markets, Daiwa Capital Markets Europe, London

 

It has been a remarkable year in Japan. What impact has Abenomics, and changing monetary policy in Japan, had on the samurai market from an issuer’s perspective?

 

Kazuhide Tanaka, Rabobank: In itself, I don’t think Abenomics has affected the issuance market per se. It had a very dramatic effect on the equity markets, on the currency and at times on interest rates, but the issuing environment as a whole?

 

We’ve seen a slightly more favourable environment, just because credit sentiment has improved overall. But the longer-term effects – if banks start lending more and they drop out of being part of the investor base, let’s say – that has yet to be seen. Actual bank lending, though it has increased a little, hasn’t affected them as an investor base. However, growing equity markets and better sentiment on the bank side has resulted in larger deposits coming in as well. So, net net, bank securities portfolios have not changed. Therefore my quick answer is: I don’t think Abenomics has changed matters for us one bit.

 

Nadine Fedon, Credit Agricole: : For the time being, short term rates are at a rather low level, but in the medium trend Abenomics  should result in higher mid- and long-term rates , and therefore higher coupons available to investors. As a result, this development should be positive for issuers.

 

Ola Littorin, Nordea: I would say that samurai bonds have been a beneficiary of this development. As an asset class they provide attractive yields, when yields have come down in JGBs and domestic alternatives which has attracted more investors in to the market. That is despite the fact that we see a much lower yield environment this year compared to last year.

 

Dennis Haring, ING: Monetary expansion in a way crowded out investors. They are more open for some yield pickup, and that’s what is being offered, especially by foreign issuers.

 

Lauri Iloniemi, Pohjola: Volatility has increased a bit, which has led to shorter term issuance, and shorter term interest from investors in samurai bonds.

 

Which is likely to remain the case for a while?

 

Iloniemi: For quite some time until things settle down, and then of course the opposite will take place.

 

Tanaka: Abenomics and the target of a 2% inflation rate on an annual basis implies increasing rates in Japan, and therefore I think one thing we have seen is a more defensive posture by investors. They are favouring shorter maturities. Rather than sticking to what was a core maturity for all samurai investors with five years, this year we’re seeing three years as a much more popular tenor.

 

Reflecting greater volatility and uncertainty?

 

Tanaka: And economic growth.

 

Louise Bergström, SBAB: I believe the importance of samurai issuance is increasing somewhat with interest rates going up in the longer end, and investors are looking for a pick-up. That’s more or less the general view, not only in Japan but in international markets.

 

The bankers here who help issuers reach these markets: we’re hearing a positive view in terms of improved investor sentiment towards issuers paying a higher coupon, but with a shift towards shorter duration amid increased volatility. Is that what you see?

 

Vince Purton, Daiwa: It may seem strange, but it’s too early to say what the impact of Abenomics will be. There has been a positive psychological effect, and in recent days we had the announcement on the Olympics as well, which in our view is another quite significant boost to the domestic scenario. So insofar as we will see a shift towards slightly riskier domestic assets, and a shift away from JGBs, then it should benefit the samurai market. It’s too early to be able to say clearly what size that impact will be. But it will be without doubt a positive impact.

 

What sort of timeframe is required for the long-term impacts to become clear?

Purton: If it’s a major change, a long-term change, most investors will take an annual view on their portfolio. So in March, April, you have the decision on the coming fiscal year; you maybe have a slight review on fiscal half-year, which is now, end-September. The timing of the announcement from the Bank of Japan was right at the beginning of the fiscal year and will take time to be digested.  We were aware that within two or three days of the April announcement there were supranationals issuing in dollars in benchmark size, with people saying: there’s a wall of Japanese money buying these because of Abenomics. But it doesn’t happen like that. It will take time to percolate through. So I think really the period from now onwards is the time we might see some real impact.

 

Sam Amalou, SMBC Nikko: I tend to agree with the view that it’s too soon to tell. The Bank of Japan’s action was conducted in early April and the samurai cycle that we’ve experienced was mainly the May-early July window. The major part was that the scale of the announcement was unexpected, and the ramifications including JGB purchases in the market are really posing a question in terms of asset allocation for investors in Japan, because they are being crowded out of their home market.

 

Perhaps the other aspect, to put it more in an international macro context, is the fact that we’ve had talk about Fed tapering as well. That really is also a dynamic that is impacting the domestic market.

 

Rabobank has been the most frequent issuer in samurai. What are the differences you see when you go to market now versus in previous years?

 

Tanaka: One phenomenon we are seeing is stronger interest in the shorter maturities, just due to the defensive posture of investors as the implications of a rate rise in Japan make themselves known. In my personal experience in our issue in May, it was the absence of some key investors in Japan – very large institutional investors who have been drivers of the market and decided not to participate in our transaction, mainly due to pricing concerns.

 

We had tightened considerably over the last two years. To put that into numbers, in May 2012 we issued a five year fixed rate at swaps plus 67; in October of 2012 our spread had come down to 40; and in May that spread had come down to 14. Call it sticker shock, or an inability to keep up with the global credit tightening we have seen – some investors just could not keep up.

 

Since then, I understand some people have accessed the market successfully with even tighter spreads, which has shown that investors will eventually come around. It’s the new reality: it’s just taken them some time to get used to it. How far this goes is a question I think we all have to ponder, because in terms of pricing over swaps for high grade issuers, we’re at single digits now. We are quickly coming up against a wall, so some pricing innovations may be required in forthcoming issues.

 

What do you have in mind when you talk about pricing innovations?

 

Tanaka: Pricing off mid-swaps maybe, or pricing off other instruments?

 

Is there a particular type of investors who has been absent this time who was present before?

 

Tanaka: Some big banks who had been major participants in our previous issues.

 

Haring: That’s why I thought it was a very good deal you did.

 

Tanaka: Yes, without those investors, we still managed to raise Y100 billion.

 

Getting back to the original question, another difference this year is I am finding a much more granular book. That is, the actual number of investors and tickets that are being written by the dealers are much more than in previous issues. Over the past couple of years these larger investors dominated the books so much that the actual number of tickets wasn’t that much. This year was distributed much more widely, to a larger number of investors, and to a wider variety of investors: not just the regional banks or non-financial corporates but even outside of Japan as well.

 

Nordea issued in May 2013 having previously issued in June 2012. How much changed between the two?

 

Littorin: Many market conditions had changed by the time we returned to the market in May 2013. Our euro reference rates were lower, the basis swap had worsened; and we had lower yields and spreads in Japan. It was a very different environment for issuance.

 

To put some numbers on pricing, when we did the first transaction in 2012, we issued a three year tranche with a coupon of 96 basis points and a spread of 55 basis points over swaps. The three year tranche this year had a coupon of 49 basis points – half of the first coupon – with a spread of 8bps over swaps – which is seven times lower. Very significant absolute changes.

 

We note that there has been a very good adaptation to the new economic environment by Japanese investors. But we also note some changes in the order books: to echo what has been said elsewhere, we didn’t see the larger tickets to the same extent as in the previous 2012 trade. Duration of the deal was shorter with relatively more interest in the three year tranche. In both of the transactions, the order books were very granular.

 

Despite the different market conditions, both transactions were very well received in the market.

 

Let’s hear from some of those who have done debut issues. Credit Agricole made its debut in the samurai market in June.

Fedon:  First, the documentation work was significant, especially for a mutualist group like ourselves which has a two-level structure. We started in 2011 to consider accessing the samurai market, as the euroyen market did not provide us any longer with the investor granularity we were looking for, and we decided  then that setting up a samurai program was the right thing to do..

 

When we started the documentation process in 2012, we expected the issues to be mostly driven by mega investors, and the predominant maturity to be five years. When we tapped  the market in 2013, it had changed. But it corresponded exactly to the aim we had in mind: to access a much broader investor base.

 

Yours was a five-tranche deal. How widely dispersed is the mix of investors you get through having five small, separate tranches?

 

Fedon: The three years tranche was larger than expected, and the five year tranche smaller. But this didn’t cause any concern in terms of funding as we have been accessing the five year tenor this year in many other markets, including the Japanese private placement market. We were quite pleased with the outcome.

 

Another recent first-time issuer in the samurai market was Pohjola from Finland. What was your experience of your debut?

 

Iloniemi: The market volatility was higher than we expected. The JGB was volatile, the swap market was volatile, the Nikkei came down during the marketing process. When I look at the result after all that, I’m still extremely happy that we did it, and am now looking for the next opportunity to visit after we get our shelf in place. For us as a debut issuer, the market was pretty crowded: there were quite a few issuers that came at the same time as us. And of course, there was an increase in the basis swap volatility as well.

 

But you achieved what you wanted?

 

Iloniemi: We did, because we wanted to achieve a samurai bond so that we can then run for a shelf in the one year timeframe. We got 50 investors, and a large number of those were regional investors, which I think is quite surprising for a debut deal. For us, diversification was what we were really looking for rather than a big deal: we are over-liquid as it is, so diversification is what we are after.

 

Why do you think you got such big regional participation in a debut deal?

 

Iloniemi: Well, maybe it’s our co-operative background: the regionals recognise another regional.

 

SBAB is the longest-standing samurai issuer of all, but with a significant gap along the way. As you have returned to samurai funding in 2011, what has your experience been?

 

Bergström: We haven’t returned since Abenomics, so I can’t comment on that, but what I can say is that we are dedicated to the market. We have the shelf in place, and it is a great funding opportunity when the market is there. We also need to look at basis swaps because all the lending we need to do is in Swedish krona, so we have to swap everything back.

 

We do keep a close look out for the market. Investor work is continuously important; also in order to maintain a presence in the market you need to go out and speak with investors, and not only the big investors in Tokyo.

 

Our experience in returning to the market has been excellent. We feel that the Japanese investor base has accommodated our needs. There is long term commitment and dedication both from investors and from us being present on a continuous basis.

 

We should expect to see you back in this market?

 

Bergström: I would say so. Looking forward, we would definitely be looking to come back to the Japanese market some time next year if the market allows it.

 

I have left ING to last for the reason that your format of issuance has been different to the others: two landmark issues last year in the Tokyo pro-bond format.  Talk us through what you have seen and learned.

 

Haring: In the case of the Pro-bond, there is also the education angle. Investors need to be comfortable with the credit, but also acquainted with the product itself. We put a lot of effort into getting the credit known better. We went to Japan a couple of times on a non-deal roadshow, and also arranged a net roadshow this year, to reach into the regional investors. What we saw in terms of diversification is that with the first deal there were a few accounts who were in wait-and-see mode: they said I’m comfortable with the credit but I’d like to see how the first deal goes, and then I’ll participate in the second one. It’s a junior market, but we’ve seen a pick-up in the number of investors and investor types. I expect that to continue.

 

There was a huge difference between the size of the first and second deal, presumably reflecting those investors gaining comfort and acceptance?

Haring: Yes.

 

Then where to from here?

Haring: We’ve set the whole project up in program style, which means we intend to regularly tap the markets, so that could be once or twice a year but that’s subject to market circumstances, for instance the volatility of the basis swap. It’s also a function of developments in our balance sheet.

 

Does it still make sense to have taken this approach rather than the samurai approach that the others have taken?

 

Haring: Yes, because we were not able to accommodate the documentary disclosure requirements for samurai. That burden was too heavy for us. It was either no local Japanese issue, or pro-Bonds. That’s pretty binary.

 

What have the investment banks seen as they have taken issuers to the market over the years? What looks different this year?

 

Amalou: In terms of issuance volume, we are seeing a trend that’s slightly downwards this year. We’re running, at this stage, at about 50% of the volume we saw for the whole of last year. That’s perhaps due to the conditions of the market, and the basis swap is not always favourable for dollar-based issuers in particular.

 

The biggest development is the shift towards the shorter end. We see two thirds of the volumes this year in three-year. That’s exactly the reverse of the previous year, when focus was on five-year. That’s Abenomics, to an extent.

 

We’ve also mentioned the lower absolute yield levels and the tighter spreads. Partly, the spreads are a reflection of the absolute lower levels, but it’s also a reflection of improving sentiment in Europe. In 2012 we had central bank intervention, verbally at least, and the introduction of OMT, so post September there was a much broader investor base that started participating in those deals, and that broadening of the investor base is good for avoiding this tendency to rely too much on individual investors.

 

Purton: If you look at the history of the samurai market, whether one looks back five years or 10 or, in my case, 30 years, the magical number is often 2 trillion yen in terms of annual volumes. Last year we were slightly above. If you look at this fiscal year, April onwards, we’re on 1 trillion, which implies we’re very much on track. If you look at calendar year, we had a very quiet period January to March, and that tends to be the time when you get the Australian issuers in. They were absent, so the overall volumes were down. If you take that out of the equation, we’re on track for a fairly good year. European issuance as a percentage is up; standalone sovereign issuance is up; the rating range is wider, it used to be AA, single A, now we’re seeing triple Bs, so getting a bit more diversity there; and quite a few new credits come into the market now as well. The split in the first half of the year was still dominated by financials as has been the case in recent years, over 60%, but with more sovereigns than we had seen for some time, and with a few corporates, such as GECC and Renault. The mix is improving.

Where did the Australians go?

 

Purton: Purton: They went to other currency markets , including the U.S. dollar , I think. It’s a basis swap discussion.

 

Amalou: And with more covered bonds as well.

 

How do your pipelines look?

 

Amalou: The pipeline is quite healthy. It’s good to see that Japanese investors have bought into the tighter spreads. The spreads we are seeing we haven’t seen since pre-credit crunch, which partly mitigates the cost of the basis swap and makes it attractive for a number of issuers still.

 

Let’s talk a little more about the investor mix. Where are new areas of demand coming in, and who gets lost along the way?

 

Tanaka: In our issues in 2012, the centrally based investor versus the regionally based investor mix was 70%, dominated by the larger Tokyo investors. In my last issue in May it was 50-50. We had 100 separate and distinct investors for the whole book, so essentially 50 regional investors participated, which I was very grateful for. And in terms of amounts, of Y101.5 billion yen, half is $500 million  equivalent distributed to regional investors – a very significant number.

 

Where in particular were they? Any patterns in regional distribution?

 

Tanaka: No, there’s no pattern. It’s hotchpotch all over Japan.

 

Lauri, you also talked about regional participation. Can you talk more about your engagement with regional investors?

 

Iloniemi: The thing is, when we were marketing in Japan, we were not marketing regionally. We were only roadshowing in Japan – three times for this issue. But we still had significant regional participation. It was a pleasant surprise for us.

 

Littorin: In terms of investor patterns, I mentioned before the reduced reliance on large tickets. To a certain extent that has been offset by asset managers and trust banks moving into the books, selling long dated JGBs and taking on short dated credit exposure. With regard to regionals we had a very good representation of regional in our first transaction. The regional demand was also a very notable feature in the second one and remains an attraction for us of the Samurai market. We spent more time on regional accounts in terms of investor work prior to the second transaction.

 

Is it easy to do? Are they an easy group to reach?

 

Littorin: It is of course more challenging in terms of practicalities; when one is discussing investor work in Japan there is a greater importance of face to face meetings, which involves a number of one-on-ones, which is easy in Tokyo but requires travelling when you want to cover accounts in various regions. We have so far done only two transactions and are in the beginning of engaging with regional accounts on a deeper level.

 

This brings us to the question of marketing and investor relations. What have you learned about the key to successful marketing in Japan?

 

Bergström: I think the one on one meetings are a very important aspect of the marketing phase. You are taking the time to go out there, spending an hour with someone who is just concentrating on you for one entire hour after their working day, which is very much appreciated. When you go on a regional roadshow you sit in a car for five hours to meet one person who might invest Y100 million or something. But it is worth it, because you see how much it is appreciated, and you get the opportunity to see how Japan works. It’s not just useful for the samurai market but in uridashi transactions, where the number of investors participating may be 5,000 people. It’s housewives, maybe aged 60, not the larger institutions. For them, it’s important you are out there and meeting with people. It shows you are caring. It is also important, when you are discussing 2 basis points here and there, that you leave something on the table, because these are products that are buy and hold rather than for trading purposes.

 

Prior to your 2011 deal, you had been absent for 11 years. Had you maintained relationships during your absence, or was it hard to rebuild?

 

Relationships are something you need to work on continuously. That’s applicable to all markets, not only the Japanese. It is something that is appreciated. Sometimes a gap is OK, but you have to explain why. Face to face is better than hearing it from the media, but as long as you have a reason for it and it is properly explained, I think it’s OK.

 

When we returned to the Japanese market after a long absence, we were pleasantly surprised. Investors were very accommodating in setting up meetings; they were looking at our credit and establishing lines eagerly. We appreciated it. We are hoping to come back to the market more frequently. Long term commitment and regularity are key.

 

For a debut issuer like Credit Agricole, you don’t have that long term public issuance history to draw upon. How, then, do you go about marketing a debut samurai?

Fedon: It’s true that we don’t have long term experience in the samurai market, as we made our debut this year, but we have been accessing the Japanese yen market regularly through private placements, and were already used to visiting Japan once a year. Now we are even more committed to visiting Japanese investors regularly. It is important to build a long-term relationship with investors, and Japanese investors are particularly sensitive to it. As well, making the effort to provide Japanese investors with financial information in their own language is much appreciated, that’s one of the reason why we favour the samurai market over the  pro-bond market: it fits much more closely with investors’ needs. Transparency towards investors is, of course, another important aspect, and this is true also for the Japanese market. Two key factors for success in the samurai market are regular interaction with investors and transparency.

 

And it will be easier when you go again?

Fedon: Well, as far as documentation is concerned, I hope so, but I didn’t find the marketing and the pricing of the issue too difficult anyway.

 

Lauri, you said you went to Japan three times ahead of your debut.

Iloniemi: Yes, and it was worth it, definitely. The first time, we saw investors who were more or less observing: who is this oddity from Finland? The second time, already the atmosphere was totally different. It really pays off to meet them more than once. Another thing that surprised me was that of course people from our institutions have visited Japan before, and one investor came with two business cards and said: where are these two gentlemen? So it is personal as well, it is important that the same people do the presentations.

 

In terms of the marketing process in a different format, pro-bonds, what can you tell us about that?

Haring: I mentioned we did two non-deal roadshows and a net roadshow to reach regional investors, and I think it was a very good thing to do. The institutional investors we saw for two days in Tokyo were very sophisticated: they are very aware of the credit, and it was very important for them to get an update because of the restructuring story that ING is in. They really appreciated discussing that topic face to face. To keep up the relationship, we will be going on a regular basis on non-deal roadshows. I would even argue internally to repeat the net roadshow once a year, at a certain point each year.

 

Is it more challenging to market through a net roadshow?

Haring: Well the process is different because you don’t have immediate feedback. If you’re in a room and you can see each other you have a bit more of a dialogue than an anonymous audience.

 

One does hear so often that the face to face interaction is so important. You can still get your message across through a net roadshow?

Haring: I think so, yes. We haven’t done a deal afterwards so I cannot compare the participation, but from the feedback afterwards, we understand that regional investors were very happy with the update.

 

I don’t think anyone has committed as much to the frequency of samurai issuance as Rabobank. Even when you have had a bond mature you have been almost immediately out there putting out another bond for those investors to go into. What’s the importance of that frequency?

 

Tanaka: Given our overall funding requirements globally, we run an extensive investor relations program year round. As far as Japan goes, we do two high level visits per year seeing the key investors. With my presence in Tokyo, I go out and visit regional investors personally with the assistance of dealers, and selectively picking the most appropriate investors that we cannot visit on a regular basis. That has proven very fruitful, and they are very grateful for my visits. I intend to continue that.

 

On top of that, having Japanese language materials is important. We make available an investor presentation that is identical to our English or Dutch language versions, as well as all our disclosure documents. And we get our CFO to make a video in Japanese – with dubbing, of course. That all helps, not only for regular investors but for regional investors coming up against our name for the first time, or uridashi sales people.

 

Haring: At ING we duplicated our English language slides into Japanese and took an interpreter.

 

What do the investment bankers here believe is the key to successful marketing in Japan?

 

Purton: The key thing is the regularity of dialogue. What the Japanese don’t want to see is issuers coming once and disappearing. They are looking for a relationship long term. We recommend people come once a year in terms of mainstream meetings; if you can go out to regions, that makes increasing sense.

 

Where specifically ought investors to go when trying to see regional investors?

Purton: It depends how much time they have. There are 47 prefectures including Tokyo. That’s 47 different points of contact. The relative importance of those will change, but it is quite difficult to pinpoint. The second largest economic centre is Osaka; Yokohama is obviously an interesting hub as well, very easy for access from Tokyo; but if you’re coming from overseas into that environment you are probably looking at being focused on Tokyo and trying to reach out from there, perhaps through a net roadshow.

 

Amalou: For marketing, the loyalty and commitment we’ve talked about is important; but there is a genuine need as well for investors to understand the credit and speak to them directly. So much has happened in Europe, with the financial crisis and changing regulation, I don’t think it’s that easy for all Japanese investors to fully grasp the meaning of those changes. It is very important for them to hear the client tell the story form their perspective, and what they’re doing to address these issues.

 

Bergström: It is important that people know who you are – not only the credit, but the area you are coming from. Europe is large. Northern countries, of which Sweden is one, are not the same as countries in the south. Differences are important to highlight, and the story of your country is important to communicate, not only your credit.

 

Fedon. I completely agree. On top of the macroeconomic questions they raise, investors are expecting answers and explanations about the European regulatory environment, which is still moving, and about banking issues. Answering investors’ questions on those topics is very important.

 

I was interviewing SSAs recently and they said that over many years of issuance they found the questions coming through in roadshows were becoming more vocal. There was a greater willingness to question. Is that what you see?

 

Tanaka: For sure. Three or four years ago it was more credit-based, but in the last couple of years there has been a much broader base of questions coming out about, number one, the Eurozone, number two, macroeconomics in the Netherlands, and number three, the Dutch banking sector, as well as various other sectors affecting Dutch banking such as housing or SMEs. As an investor relations person, it’s becoming tougher to answer all those questions: you really have to go in there with your economic notes in proper order or you will not be able to answer them.

 

Littorin: When you go into a meeting, there is a trend that investors are much more prepared and have a list of questions they want to discuss. The meetings tend therefore to be more and more interactive. This is very positive for both parties.

 

Bergström: In group presentations people used to be very quiet. Now you do see investors asking questions. It’s very encouraging.

 

Amalou: It is interesting you raise this in the context of SSAs. When the Eksportfinans downgrade happened, there was an expectation of government intervention, and at the time institutional through to retail had significant exposure to the issuer. That was a very visible event which perhaps has triggered a more introspective questioning of some of these issuers, and in particular their relationship with government.

 

Iloniemi: I had the unfortunate experience of visiting investors in Tokyo that very day. It was difficult for them to differentiate between different Nordic countries.

 

Purton: I remember doing meetings 25 years ago, and if you had a one on one meeting you would have two or three general non-specific questions. Now you will go in, get 10 or 15 questions, and run out of time. There are very specific questions on the credits. The whole environment has changed.

 

Tanaka: It’s for the better. It’s healthier.

 

In terms of tenor, you’ve talked about the trend towards shorter dates, but some of you have successfully raised 10 year funding.

 

Littorin: We had a 10 year tranche in our 2012 trade. We were exploring a 10 year tranche for the follow-up trade this year, but the price difference versus euro, which was our reference rate, was too big and deteriorating as the basis swap moved away from us, so we decided at an early stage to drop that.

 

Does this mean you no longer see the insurers, the traditional long buyers, in your deals?

 

Tanaka: They are still in my transactions. They’ve shortened out, but they are still there, and there are more insurance companies participating in samurai issues than in the past.

 

Do they lack other alternatives?

 

Tanaka: All kinds of reasons, but yes, that’s one. The JGB in 10 year is not as available as in the past.

 

Littorin: We were able to move much of the 10 year interest into the five year tranche. We maintained the investors in the book.

 

Most of you have raised both fixed and floating rate funds, usually much bigger on the fixed side. What demand do you see for floating rate samurais?

 

Tanaka: As we go forward and the concept of rates increasing in Japan takes hold, we will see greater demand for floating rate notes. Traditionally demand is from the regional sector, and that will continue, but I think it will spread to other investors.

 

Bergström: It’s important you listen to what investors are looking for. From our perspective, it doesn’t matter if you are fixed or floating: we still have to swap it back to euros and then to krona. It’s the complete economics of the trade we are looking at. We want to reach into the granularity, that’s important for us, and if you get demand in a certain tranche you didn’t think of initially, you might try to accommodate what is being asked for.

 

Purton: The general view is to look at as many options as you can. A distinct characteristic of the Japanese market is that you can post quite a few different tranches and can drop some of those tranches if the response isn’t what you expect. Whether you are marketing four, five or six tranches, you have that option.

 

We’re seeing an increase in three year issuance right now, but we’ve also seen less at two years. But the demand picture is always evolving , and being flexible, being able to print both fixed and floating, and to have the confidence to drop tranches if demand is not acceptable – that’s the way forward. If you’re looking at the Samurai market from a perspective of what works in other markets it’s very different but in a positive way. Issuers can and do issue some tranches of only one or two billion yen – the range of tranche sizes this year is from 1.5 to 72 billion Yen – a huge disparity, and that is very much the norm in Japan. If you try to do that in a public format in the non-Japanese markets, it’s a no go. Japan is an issuer friendly environment insofar as you can compartmentalise the demand and you don’t close any door at the beginning.

 

It’s interesting in that there seems to be no shame in axing a tranche for lack of demand, whereas in dollars or euros that would be considered something of a failure of the deal.

 

Purton:  No, it’s very much a placement market, buy and hold. You are getting away from the liquidity obsession where whatever you do has got to be $500 million or a billion. You can pick and choose what size you want to do and at what tenors.

 

Fedon: You fill the needs of investors. For an issuer that’s not a problem: you can expect your issues to be less volatile. It’s rather positive, from the issuer point of view.

 

You did I think have a two year tranche in yours?

 

Fedon: Yes, we did 22 billion in the two year tranche.  I had expected a higher amount in five years while working on the project, but in the end, of the 60 billion, only 15 billion was in five years.

 

Do other people share this view that there is less stress on liquidity and size, and that this therefore gives you greater flexibility as an issuer and works to your advantage?

 

Tanaka: Definitely. You can come up with very odd issuance amounts. It’s all to accommodate investors. The incremental cost of another tranche is negligible: you are paying slightly more in fiscal agency fees or legal fees, but it is worthwhile doing. There is no liquidity requirement that these investors are asking for, nor do we seek one. We are happy to satisfy that demand.

 

Fedon: And orders in the book are real, not necessarily inflated, as may be the case in certain other markets.

 

Littorin: Investors appreciate a borrower’s willingness to be flexible in printing tranches that would meet the investor demand at the time.

 

Haring: For us it is important to comply with market practice, with the non-rounding tranching. There is no point in us saying we’re going to do this European style, where we’ve got 11.3 billion but we’re going to round it to 10. If market practice is 11.3 billion, we’re totally fine to do that.

 

Iloniemi: It makes it a more level playing field, in a way. It is easier for smaller issuers. The size of the issuer is less important.

 

Amalou: If you look at the distribution for each tranche, it allows you to access different kinds of investors as well. It’s good for the footprint.

 

Does a samurai lead to other formats of issuance in Japan? Many of you issue in uridashi, for example. What are the relative merits?

 

Tanaka: We issue urdiashi bonds on a regular basis. Uridashi is a very effective form of funding, and a good diversification away from any other market in the world. It is Japanese retail at work. We manage to do a billion euros equivalent annually in that market. It makes a significant contribution to our overall funding needs at an attractive cost of funds.

 

Lauri, you mentioned getting a shelf program underway. What are your long-term ambitions in other formats in Japan?

 

Iloniemi: We are in the Japanese market purely for diversification, so uridashi would obviously make sense for us in the future when we get the shelf in place, and that is what we are planning to do.

 

Fedon:  The idea is to have tools that fit investors’ needs, and allow us to access all investor bases. We started CACIB’s  uridahsi program in April 2011, and it is a successful tool to raise liquidity from retail investors, and mostly through structured issues. We are pleased to have at our disposal these three formats: samurai, uridashi and euroyen, and they work well in parallel.

 

Littorin:  We filed our shelf early in the year for the samurai, and then took the decision to file for an uridashi shelf. We have done a couple of transactions: it’s about creating relevant tools for the issuance and diversification need you have as an issuer. The samurai and uridashi programmes complement each other in a very good way.

 

Amalou:  Perhaps we can tie that in with the earlier point about investor relations, in that you don’t necessarily always know where investors are going to pop up. When you miss out on them in a samurai transaction, you may see them in the private placement market, or in non-yen. As far as uridashi is concerned, the retail market is much larger than the samurai market in terms of annual volume. It really multiplies the opportunity for issuers who have access to that market.

 

Purton: Samurais are largely for institutional investors and uridashis tend to be retail, but put the two together and you’ve covered the whole of the domestic investor base.

 

Dennis, taking a broad view, what would you say about the Pro-bond market at this stage?

 

Haring: It needs time to develop, just like the 144a market took time to develop. It’s not a competitor to the samurai market, it’s more of an additional flavour for issuers who do not want to go down the more cumbersome samurai route. It means investors have more credits to choose from, or will do if more issuers go down the pro-bond route; and for investment banks it’s a new slide in the pitchbook. I expect there will be more issues in the near future.

 

Why haven’t we seen more of them yet?

Haring: I think some debt issuers were already underway with their samurai work: if you’ve been working on a samurai for a year it is difficult to throw that aside and switch to pro-bonds. Because it’s a new product, people need to get used to it. There are a couple of names who have filed a programme. I think it is natural that a new flavour takes time to be popular. We should be patient.

 

Bergström: I was a bit surprised you chose the pro-bond route. The reason we chose a samurai was for diversification. Including Japanese language in the documentation was something that was very much appreciated by the Japanese investor base. A pro-bond looks much more like euroMTN. What was your reasoning?

 

Haring: Because it reaches into more pockets. The programme is under Japanese law, and it settles through Jasdaq. That is a bit closer to home than an EMTN.

 

Bergström: Yes, but many regionals may not have the proficiency in the English language. If you’re trying to reach that investor base, it’s important to do what they are accustomed to.

 

Haring: You should regard it as somewhere in the middle. It is difficult to reach into the smallest pockets of demand, and that’s not going to be feasible with a pro-bond, I understand that. But it is somewhere between euroyen and a samurai, and that was an acceptable position for us. We set up the pro-bond programme in eight months: after that all we need to do is update it, to send an email to the exchange and local council. That’s it. There is a balance between the effort involved and the diversification benefits. For you (SBAB, with a shelf) it’s easier. For us, to get a samurai shelf in place, with all the documentation and several due diligences (including a physical one) and the two or three comfort letters and so on… it was too big a mountain to climb.

 

Bergström: How much would you expect to raise from Japan on an annual basis?

 

Haring: It’s difficult to predict, but we raised Y225 billion in 2012, which is substantial.

 

Bergström: Well, I think it’s brave being the first. I wish you all the best. But I still find it difficult to believe in that product.

 

Iloniemi: We all have different objectives and different products for those objectives. For us it was a no-brainer: we studied the benefits of both approaches and decided for us that true diversification was the main objective.

 

Littorin: From our perspective, given that we have a samurai shelf already, we don’t see value in a pro-bond. One disadvantage is that Pro-bonds are excluded from some relevant indices, such as the Nomura BPI index, which in practice excludes a number of investor groups.

 

Haring: But one thing to add is that a pro-bond has more flexible windows than a samurai.

 

Did Credit Agricole consider a pro-bond?

 

Fedon: We are in the Japanese market for diversification purposes, and therefore we wanted to be able to access the broadest possible investor base. That’s why we favoured the samurai format, although we knew the documentation process was much more burdensome than for the pro-bond format.

 

Haring: Sam, what would you say is the overlap of the investor base between a samurai and a pro-bond?

 

Amalou: It’s true that because of the index exclusion, many pension funds and asset managers won’t participate in a pro-bond. To come up with a percentage you would have to look at what participation trust banks and asset managers have had in recent years. Although this has increased in 2013, the overlap remains quite significant.

 

Purton: The private placement concept will make it difficult for some, but by no means all, regional investors. But over time, the number of accounts who can buy a pro-bond will increase.

 

For a first time issuer, you have to look at the trade-off between the ease of issuance, documentation, disclosure, and targeting a smaller investor base. There are a couple of other issuers who have filed for pro-bond issuance , such as ICICI recently , which is promising , as well as other issuers who are looking to do so for another reason , namely because their home GAAP is not currently approved for Samurai issuance but is accepted under the pro-bond format. So for them, there’s a different element to the discussion: this is the only way they can access the Japanese market without getting home GAAP approved. So it’s not just pro-bond versus samurai for them, it’s pro bond or nothing.

 

Amalou: The product was only introduced about two and a half years ago, and it has the seal of approval from the Tokyo stock exchange and the Ministry of Finance. It’s a genuine alternative, and as an intermediary, we can’t ignore it. It’s fair to say that it is a greater commitment than euroyen: it involves going out and listing on the stock exchange. People were sceptical a year and a half ago but when the first deal emerged and raised in excess of Y50 billion, you had to say there is genuine interest out there.

 

Tanaka: Well, on the seal of approval from the Tokyo Stock Exchange, that’s obviously there: it’s right in their offices. And the manner of listing is a fiduciary requirement that is not required by any Japanese investors, so it is somewhat contrived. But the more foreign issuers we have in the market, the healthier it is overall. The investment pipe becomes bigger. Whether you or ICICI can only issue in this market through this vehicle – that’s fine with me. All investors will look at them all as foreign issuers and not differentiate between the products so much. The more the merrier, and it’s an investment alternative. I don’t think it’s going away, and if you can’t beat them, join them.

 

Having said that, for me, there’s no requirement to use the programme: we issue twice a year in samurai bonds and I think there is no market capacity beyond that.

 

If you look forward, what role do you expect samurais, and Japanese issuance generally, to play for you?

Bergström: A continuous presence in the samurai market is important, and going out to Japan on a regular basis to get the face to face time. We would expect to come to the market at least every 18 months.

 

Iloniemi: We are applying to be a regular issuer, and we hope to do one issue a year in the samurai markets. Apart from what the Japanese investor can do for us, we hope we can provide diversification for them as well.

 

Haring:  For us, local yen funding is here to stay. We will keep on using and tapping the markets, especially for diversification purposes.

 

Littorin: The samurai market will continue to play a very relevant role in our funding. Together with the US Yankee market and the European market it forms one of our three main international funding platforms with very limited overlap between them.  We will be active regularly in the Samurai market, and we will continue to explore the uridashi market.

 

Fedon: Japan is an important source of diversification, both in terms of currency and investors. This is not exactly similar, as we also issue in Japan in USD. The rough idea is to have 10% of our funding out of Japan, and we are already there.

 

Tanaka: After our last deal in May, our total outstandings in the market grew to Y960 billion, making us the largest samurai issuer by volume. That speaks of our commitment to the market. We consider it one of our core issuance markets. Like Credit Agricole, 10% is our number: last year it was 12.5%, and this year we are well on our way to over 10% again. That is a ratio we will look to hit on an annual basis.

 

Purton: We are in very uncertain global times, and the attraction of the Japanese market, whether it’s samurai or uridashi, is that it offers a complementary investor base. All things being equal, the more investors you have around the world who are willing to take your credit, the better the situation you are going to be in.

 

Amalou: After the Bank of Japan’s move, where we see it buying as much as 70% of JGBs in maturities to 40 years, investors will be pushed to look at other credits to buy into. Therefore there is plenty of room to grow for the future.