Global Capital Japan Roundtable: FIG Issuers

Global Capital, September 2014 

Participants:

Kazuhide Tanaka, head of Japan office, Rabobank

Valérie Brunerie, head of funding, BNP Paribas

Patrick Bryant, head of group funding, Commonwealth Bank of Australia

Peter Green, Senior funding, Lloyds Banking Group

Hee-sung Yoon, Director General, Head of Treasury Department, the Export-Import Bank of Korea

Vince Purton, managing director and head of debt capital markets, Daiwa Capital Markets

Sam Amalou, managing director and head of debt capital markets, SMBC Nikko

Steve Apted, managing director, SMBC Nikko

Chris Wright, Global Capital, Moderator

What issuance trends have we seen from FIG issuance in yen lately?

Sam Amalou, SMBC Nikko: This has been a strong year in terms of samurai volume. We’ve already exceeded in this calendar year the total volume we saw for the whole of last year. We are maybe 3-400 billion yen short of the Y2.2 trillion record of recent years in 2011, and if I look at the pipeline I wouldn’t be surprised if we exceeded it.

Financial institutions remain the core component amongst all issuers. In 2012 and 2013 they constituted about two thirds of total issuance volume, and this year they’re at around 80%, so if anything, their presence is actually increasing.

Why the dominance of FIG issuers?

Amalou: In previous years you had more JBIC guaranteed issuance and we haven’t seen any this year yet. But there are sovereigns looking at issuance before the year-end. Also, financial institutions are typically very active in June and July, so on balance although skewed now, I don’t expect the full-year breakdown to be that dissimilar to previous years.

Vince Purton, Daiwa: This year one major trend has been the return of the Australian issuers. They were absent last year largely because of the unattractive nature of the cost comparison, but they have come back in punchy numbers and size. Whereas last year we had about 4% of overall issuance from Australia, this year it’s been around 14%.

Otherwise, the geographical nature of FIG issuance has been fairly consistent, with Europeans being the majority, combined with regular issuance from Korea, and a little bit from the US as well. Volumes are up, and we are seeing a lot more deals capped in size, which is positive for the market albeit, historically unusual.

Within Europe, we’ve seen continued growth in issuance from Scandinavia, moving from debut to repeat issuance, which is hopefully going to be a regular thing. We have seen a consolidation of supply from France and a return of issuance from UK names, and Rabobank has remained an active and consistent trend setter too.

We’ve seen several FIG names looking to move to issuance twice a year rather than once. Beyond that, the general trend of 2014 – a move down the credit curve, longer maturities, tighter pricing – continues.

Kazuhide, Rabobank is one of the most prolific samurai issuers. What patterns do you see?

Kazuhide Tanaka, Rabobank: One feature that’s been there for the last year is that as spreads are compressed, the higher grade FIGs like ourselves are looking at issuing very close to flat to swaps. And obviously there is some investor pushback in that regard: something that was being offered at 20 over swaps a couple of years ago is now offering next to nothing, and at the same time rates have come down.

The redeeming feature is that local issuers – Japanese high grade – are offering even tighter spreads in the domestic markets, so samurais remain a better alternative than domestic bonds in terms of the spread they offer for an equivalent credit. Therefore the market remains in good shape overall. But it’s clearly approaching levels where something may have to give.

Last week we saw Svenska Handelsbanken, similarly rated to ourselves, offering a spread of swaps flat in the three year maturity. There was investor acceptance of that, but where is this going? At some point either the market becomes unattractive for high grade issuers like ourselves because investors will no longer accept the spreads which reflect our credits, based on our secondary levels or funding levels in other markets; or investors become more accepting of negative spreads – swaps minus x.

The private sector banks haven’t approached that point yet but CDC, a French agency, did offer something at sub-swaps earlier this year.

Your last issue, in May, raised just over Y100 billion across four tranches at very keen pricing. Was there still good demand at those levels?

Tanaka: Yes, I believe we did have healthy demand at those levels. Very healthy. We issued in May in an environment where the market was extremely good in Europe, so our spreads were tightening as we marketed the transaction. If you looked at the yen swap spread versus our secondary level, it became more attractive by the day. Investors realised it was an attractive opportunity and they took advantage of the small premium we did pay.

What proportion of your overall funding is now done in yen?

Tanaka: Last year it was about 12%. So far this year we’ve only done one issue plus what we’ve done in the uridashi market, so a little over a billion euros equivalent, which is about 5% of our global total at this point in time.

But that should grow later in the year?

Tanaka: Yes, definitely. There will certainly be more uridashi issuance. But with samurais, the basis swap is always a determining factor; we’ll have to be very careful in assessing our timing if we’re to access again in the remaining few months of the year.

Steve, Kaz says something has to give. Is that right?

Steve Apted, SMBC Nikko: Not necessarily. If something gives, you’re looking at something more fundamental: a credit event or a meltdown in credit spreads globally. For investors in Japan, it is still very much a relative game. There will be a reluctance to purchase international names at a spread that is tighter than the domestic equivalent – so there is a domestic floor, some sort of resistance level.

Amalou: Issuers look at the other side of the equation and are more focused on the all-in cost level. As long as that is competitive, they will continue to look favourably towards the samurai market if their funding needs allow.

Valerie, BNP Paribas has issued samurai several times, most recently in September 2013. How has the market changed over time?

Valérie Brunerie, BNP Paribas: I think there is now a better understanding and knowledge of financial institution credit from Japanese investors. They used to rely more on the rating, which made it more challenging for bank issuers. In their diversification with foreign names they would start with SSA, and then move to the better-rated banks. Maybe AA plus. Now they are prepared to look at a wider range of credits. Of course, the whole market has shifted, so it is difficult to tell if they have evolved or if they have been pushed to choose lower ratings by the market, but it is a trend.

Also, there are more investors now. The market was more concentrated some years ago: it was big investors, usually Tokyo-based, whereas now more and more investors appear in the books.

What role does Japan play in your overall funding?

Brunerie:  We don’t disclose the percentage, but we use it as a diversification. It’s not massive for BNP – the euro is our base of funding – but it is important.

How about the cost of funding?

Brunerie: It depends. First, the currency swap is volatile; it is better at some times than others. We are never ready to pay too expensive a price for diversification, as we have no need for yen. So the pricing has to be consistent with what we can get directly in euros or in dollars.

How did your most recent deal compare?

Brunerie: It was attractive. We were slightly below euro pricing.

Patrick, Commonwealth Bank of Australia issued most recently in April (Y75 billion five-year samurai). How did the market compare to your previous issues?

Patrick Bryant, Commonwealth Bank of Australia: To be honest, we found it hard going. At that time there was a little bit of stress, not just in the Japanese market but in global markets generally. It didn’t meet all our expectations: a solid deal, but we were slightly underwhelmed. Whereas in the past we had tended to be surprised on the upside, we had to scale back our volume from our expectations this time.

Generally, though, we see it as a really consistent, solid market for us. We have a shelf programme we update twice a year, and like all Aussie issuers, there is only a limited period within which we can issue. Within those windows, in the last couple of deals it hasn’t been the cheapest market for us to issue in, but it’s been competitive with global markets and we’ve been happy to issue into it. We do it for diversity purposes and we look at it each year as one of the key markets to issue into.

We last saw Kexim in the samurai market earlier this year (Y76 billion in March). How has the market changed for you over time?

Hee-sung Yoon, Export-Import Bank of Korea: Kexim is a regular issue in the samurai and uridashi bond markets. Our most recent issue of samurai bonds was in March this year. We saw the market remain stable since our previous issue, in May 2012. JGB yields and yen swap rates are low, and there is an abundance of liquidity in the market. That is why we could drive strong demand and successfully issue more than our target.

How did price compare?

Yoon: The price has dramatically dropped compared to the days in the 1990s when we first visited the Japanese capital markets. Kexim is now well-known as a benchmark issuer among Korean issuers to Japanese investors. We have observed even stronger demand for Kexim’s samurai bonds in recent years due to the historically low level of benchmark interest rates in the Japanese domestic market. [Kexim’s most recent deal priced at 15 basis points over swaps in a two year tranche, 18bp for a three year and 27bp for five year).

And how much of this year’s funding has been made up of Japan-targeted product?

Yoon: Approximately 16% of our total funding was secured by Japan-targeted product so far. This ratio has been around 20% on average for the last three years.

Peter, what does Japan represent for Lloyds?

Peter Green, Lloyds: It’s certainly what we would regard as one of our strategic benchmark funding markets. The themes that have been impacting our own issuance requirements over the last few years have been fairly well publicized, and our global funding requirements have been reduced since early 2012 as the group rebalanced its funding mix across the balance sheet.

As we get back to what we would describe as business-as-usual, given that the balance sheet transformation and funding mix work is largely complete, we expect to have a “steady state” funding requirement over the next few years that will give us the opportunity to re-engage with a wider variety of markets than we have needed to do in the recent past.

In Japan, the funding dynamics appear to be pretty favourable. There seems to be a good level of demand for risk assets. It’s a question of weighing up the economics of all the funding options that we have available to us, and looking at how we can best maintain investor dialogue across all the pockets of liquidity we have available.

Have you stayed in touch with Japanese investors throughout?

Green: Right the way through the cycle we’ve maintained a global investor relations programme, including Japanese investors, on both the public and the private placement side. We’ve been reasonably active in uridashi product, so during the calendar year we would normally look to roadshow in most of the core regions, including Japan, at least once or twice to maintain a dialogue with investors and keep them informed of developments in the credit story. We’ve also looked to maintain close links with dealers who sell private placements into Japan on our behalf.

Vince, how big a problem is the basis swap for issuers in yen?

Purton: Most credits looking at the samurai market – though not all – are going to swap out, either into dollars or euros. A lot of credits are looking for cost neutrality in a Japan issue, but the basis swap can be an obstacle. That said, there has been a very significant improvement in the basis swap, in terms of a decline in its negative impact, and that has encouraged many more issuers to look at the market. It also means that, beyond the FIG and SSA names , we may begin to see more corporates.

How does the swap work for Australian issuers?

Bryant: We have to go through two swaps: yen to US dollars, then US dollars to Aussie dollars. There’s no direct swap from yen to Aussie.

It’s not prohibitive. There is a cost involved in doing it, but it’s a normal cost of doing business. The yen basis has been pretty volatile over the last few years, and two years ago it made it very expensive for us to issue in yen, but lately it has been improving.

And euros?

Tanaka: Going into euros it’s OK. But looking at the combination of tighter secondary levels where we trade in euros, versus what that implies in yen swap offer terms, we’re now at the point where we have to consider zero to negative numbers to make it worthwhile for us at this point of time. That’s why I say: something’s got to give here. It’s inevitable someone is going to do an issue with negative spreads.

How about for Kexim in Korea?

Yoon: The cross-currency basis swap is one of the key factors that we consider when issuing samurai bonds, because we swap the proceeds into US dollars. A higher basis swap makes us achieve tighter pricing.

Sam, what do you see in terms of price competitiveness?

Amalou: If you look at how spreads have been trending lower – not just in Japan – investors have been following those developments and have been quite happy to have access to paper at tighter levels. Financial institutions have been issuing in five years at between +1 and +25 since May, depending on the credit. That is partly a reflection of overall tightening and partly because investors are more comfortable with international financial institutions as issuers. From June last year to today, five year CDS levels for senior EUR financial institutions have gone from about 170 bps to 60 bps.

At the same time, it makes sense for banks to continue to access Japan because we have had, in parallel, a tightening of the basis swap, so swapping out of yen and into euros and dollars brings a favourable outcome, in many cases an end result pretty similar to what you see in the euro market.

Pohjola Bank is a good example. They used the Shelf Registration for their second outing – the inaugural trade came in June last year – and happen to simultaneously launch a euro transaction during the samurai book-building. We had a directly comparable costing and the spread differential between the two was no more than a couple of basis points. Issuers are happy with that: they are getting competitive cost of funding, but also diversification, which for most of them was the original reason they committed themselves to building a samurai franchise. [NB: Pohjola feature in the debut and repeat issuer roundtable on page xxx]

As spreads have tightened, are investors looking for longer maturities for yield?

Tanaka: Yes, they are moving down the credit curve, and that is shown by the types of credits coming: a lot of single A names have been able to raise funds, Mexico came to the market again in unguaranteed format, and investors have been forced into these trades in order to achieve their return targets. In our May issue we had a 10 year tranche, which started out as a reverse inquiry type of deal. Dealers came to me early in the process and said there were some large investors interested who could be complemented with smaller regional investors looking for a higher yield. We looked at it, it made sense, so we proceeded with a 10-year tranche [of Y7.8 billion].

Will we see more of them?

Tanaka: I think so. There are deals in the market right now. It’s not all that common, but a few have gone to market.

What difference has Abenomics made?

Purton: I’ve always been cautious about making a clear causal relationship between Abenomics and the increase in samurai issuance. Nonetheless, whether it’s because of Abenomics or global factors or a combination of the two, we are certainly in an environment of historically low rates and tight spreads in the Japanese domestic market, and a smaller volume of competing domestic supply. In consequence the balance of power has shifted towards the issuer and we are seeing a lot of samurai issues pricing ever closer to, or even through, yen swaps; and longer maturities and a wider variety of names within the investment grade universe.

Yoon: Abenomics played a huge role in lowering JGB yields. As a result, yield-seeking investors in Japan have more interest in samurai bonds than domestic yen bonds. Even local institutions who have shown no interest in foreign issuers so far have started to invest in samurai bonds.

Brunerie: For the time being, I don’t have a feeling that there is any less interest from Japanese investors. Abenomics should be good for the economy, meaning there should be more demand for loans, thus less liquidity in the market available for foreign issuers, but so far we have not seen that effect.

Bryant: Pretty much zero. What we’ve seen most of over the last couple of years is the growing demand from wholesale investors in Japan for non-yen products. We are seeing more investors in Japan wanting to invest in US dollars or Aussie dollars. But I don’t think that has anything to do with Abenomics.

Then why isn’t it having an impact?

Bryant: You’ve got to look at the impact it has on investors in Japan, and for us, it’s not making a noticeable difference to investment patterns. For us as an issuer, we look at the cost of doing business in Japan and swapping it back to US and Aussie dollars. We just haven’t seen a significant impact on anything that impacts those factors. Domestically, it may have had an impact on investors, but we haven’t seen it flow through into demand.

Green: Abenomics has undoubtedly had an impact on markets. As has been seen globally, a supply/demand imbalance has clearly influenced credit market technical across the globe.

Tanaka: The general condition of rates and spread movements in Japan has not resulted in equities or rates going up; in fact rates have come down significantly. Therefore the samurai market continues to be attractive for institutional investors as Japanese credit products do not offer any form of attractive spreads.

Do you find that demand exceeds supply?

Bryant: In the past it has. We have had very large books on some of our deals in the past. Our most recent deal was probably impacted by global factors which made it disappointing in terms of size. We’re a relatively big issuer and can generally handle the size we can get out of Japan; if it’s a hundred billion yen, it’s not a problem.

Yoon: With apparently strong momentum in the samurai bond market, and little supply of Korean issuers these days, we see good demand for Kexim’s bonds.

Brunerie: Yes. We see good demand. But this market is a bit complex in terms of strategy: it is very difficult to optimize the funding. It’s so different from what you can get in euros and US dollars where you can decide within five minutes to issue. With yen you have to prepare yourself. You have to take the decision that you will go to the market about a month in advance. You have a long official marketing and pricing period. For those reasons it is not a market where you feel comfortable to be present very often: it works once a year, or something like that.

Bryant: One thing that frustrates us – and we give this feedback to Japanese banks – is that the whole process of launching and marketing and pricing a deal stretches between three and five days while they build a book. If we do Aussie, euro or US it launches and prices in the same day, which minimizes market risk.

Kaz, could you have raised more in your May deal?

Tanaka: I think so. Bet getting the most volume is not the only game. It’s a matter of price as well. We had to come up with the optimum balance of pricing and volume. We were starting to offer at a premium to our secondary level: we had to cut it off at some point.

What developments do we see in Pro-Bond?

Purton: Pro-bond is now something that is part of the dialogue. Two years ago, a lot of issuers acknowledged the existence of the market, but needed to be convinced of its merits. This year several more programmes are being set up, and we are seeing issuance under some of them.

In the past we would have said it was a chicken and egg situation: issuers wanted to see critical mass before looking at the product, and that reticence prevented such mass being obtained. But we’re now through that. From the conversations we have, particularly for new credits, it’s certainly now part of the conversation: ‘’you can do samurai and here are the benefits, or you can do pro-bond and here are the benefits’’. Now, depending on circumstances, a few will say pro-bond suits them more than samurai.

Brunerie: We’ve look at pro-bond and thought about it. It can be very interesting for people who have no samurai documentation, when they are starting from zero. But for us, knowing we are also active in uridashis, where we need to maintain the same documentation as a samurai, we wouldn’t make a real saving in terms of legal costs if we were to issue in pro-bond. One thing we are still investigating is, even with the samurai shelf we have to maintain, would we gain an advantage in terms of the decision process through pro-bond? If it was the case, it would be a clear advantage of this format.

Bryant: We’ve kept an eye on it but haven’t done anything in that market.

Green: Because we do have the ability to issue in samurai, we’ve got the gold standard there, and wouldn’t see any benefits in looking at any other structure.

Yoon: Pro-bond is not attractive for us because we are already a well-known, frequent issuer in the samurai bond market. We hope to diversify investors by issuing more public offerings.

Tanaka: It’s been confined to two or three issuers. It’s really a small, niche market. I don’t have an opinion on it because it really doesn’t affect what I do. Regular issuers of samurai, I think, wouldn’t have any attraction to pro-bonds.

[NB: To hear from two issuers who have taken the pro-bond route, ING and First Gulf Bank, see the roundtable on debut and repeat issuers on page xxx]

How about Japanese participation in your non-yen paper?

Bryant: It has been increasing quite significantly. We did an RMBS deal which priced last week [end August], an Australian dollar mortgage-backed trade. In the past we hadn’t seen much demand from Japan for that product, but this time we saw significant demand.

Why?

Bryant: Higher yield, in a currency they trust. When you look at the JBG yield curve with short dated JGBs at .1 or .2%, if we can offer a decent running yield on a solid AAA currency, then we are going to be attractive.

Green: The major Japanese investors have always been active. We have had relationships with some of the key investors in Japan since before we had access to the samurai market. Levels of liquidity in the market are so high they are not just concentrated in domestic yen product.

Tanaka:  It is my understanding that some of the largest investors in Japan buy into our dollar and euro benchmark issues, and in considerable size, but I think it is confined to maybe five to 10 investors.

Yoon: Yen-denominated samurai bonds are our main funding source in the Japanese capital markets, although we have diversified currencies in uridashi bonds from developed market currencies – Australian dollar, New Zealand dollar, US dollar – to emerging market currencies like TRY, BRL, ZAR and MXN in order to satisfy demand from retail investors. We also borrow US dollar denominated loans from Japanese commercial banks.

Uridashis used to be the preserve of higher rated issuers, but are we seeing them more from banks now?

Purton: We see interest not just in SSAs but higher rated financials. Historically it was very much a AAA SSA market, but given the tightening of spreads, as in other markets, we have seen a cautious move down the credit curve. It has stayed very firmly within the investment grade universe, but some good single As are seen acceptable credit risk by the retail community now.

We’re seeing that in the samurai market too: A and AA rated names are 85% of the market, with 10% triple B or unrated JBIC-guaranteed deals.

Brunerie: We like uridashi. With demand coming from retail and the private banks, individual sizes may be smaller but you can come at a regular pace. It requires the same heavy legal documentation as a samurai, but we like to use it.

Bryant: We use our shelf programme for uridashi. We will talk to various investment banks and they come to us with proposals a couple of times a year. We are happy with doing multiple uridashis per year through different dealers: we might use Daiwa or Nomura or whoever and have different transactions in the market at one time. Generally, demand for them is very strong.

Yoon: Since Kexim’s debut in the uridashi bond market in 2011, uridashi bonds have become an important funding vehicle for us. We have issued more than US$1 billion equivalent annually, though demand has weakened this year due to the recovery of the Japanese stock market.

What structures work?

Brunerie: Equity-linked; also FX products, in currencies like BRL. Interest rate products are tougher because of the global level of rates all over the world. It is difficult to build attractive rate products.

Bryant:  We get shown bullet structures, as well as things like three non-call one callable structures, in a variety of currencies: it can be South African rand, Brazilian real, Aussie, US, Kiwi dollar.

Tanaka: We are very conservative in our uridashi policy. We only do plain vanilla foreign currency issues, the favourites being Australian dollars, Turkish lira and New Zealand dollars. In the past people sometimes looked to Russian roubles or Hungarian forints and we accommodated that, but current demand is in the usual stable currencies. As a matter of policy we don’t do structured uridashi.

These will probably become more popular as the yen keeps on weakening. The writing is on the wall and it is happening as we speak. The Nikkei hasn’t gone anywhere this year. A large pool of funds is committed to the market, and as bonds mature people will invest those funds, and there is new money coming into the market as well. Uridashi will continue to supply funds in that environment.

What is the key to successful marketing in Japan?

Purton: I would say the nature of face to face meetings in Japan is on a par with similar meetings in the US and Europe, in terms of the level of understanding from the investor of the credit. Every issuer we take there says the only difference is that you get the same questions, but planted in a more conversational and less confrontational mode. They still require the answer.

Investors look at each credit on an individual basis. If the story is a good one, they buy; if not, they won’t.

The importance of clear, regular, detailed dialogue is growing all the time. We always encourage people to go out at least once a year to see investors, whether for a deal or non-deal roadshow, to keep the dialogue going.

Also, the number of active samurai investors has grown from both Tokyo and regional accounts. There are always new investors to educate as well as old friends to update.

Tanaka: [The key is] To make everything investor-friendly. We conduct two high-level roadshows in Japan every year, when someone from head office at a senior level comes to meet our biggest investors, once after the annual results and once after the interim results. We combine that with having all of our presentations translated into Japanese and available on our web site. And of course disclosure in Japan, as you have to do in samurai and uridashi issuance, makes all information accessible and available to Japanese investors. And actually that’s a lot of hard work.

In the last few years we’ve reached out to regional investors, going to northern and southern Japan and everywhere in between trying to meet smaller investors who don’t have the opportunity to meet with us on a more regular basis.

Green: I don’t think there is a difference in the way you approach Japanese investors. They wanted to be treated in the same way as any top global investors would. But where we’ve had success has been a consistent approach to investor relations work even when there are no trades to be done. We spend time in front of investors, giving them face time and regular updates on developments within Lloyds. That’s been beneficial in private placements and in benchmark transactions.

Larger investors in Japan are not concentrated solely in yen product: they have an interest in other currencies. We have always had a very currency agnostic market strategy for investor relations in Japan. It’s much more about keeping the story current, and not hiding from any issues that have come up, being open and honest in our approach.

When you do come back, do you expect a positive view from Japanese investors for Lloyds?

Green: Yes, I’d like to think so. The Lloyds story has been about delivering what senior management set out to achieve. We’ve had good success in delivering on the strategic promises this group has publicly stated, we’ve seen the benefit of that in the direction of our credit spreads, and we wouldn’t see any reason we wouldn’t have a favourable reception in any market as long as the deals were done in the right way at pricing that made sense and were reflective of where we trade in global markets.

Brunerie: We visit Japan once a year, even for non-deal roadshows. We receive a lot of Japanese investors in Paris, more so than the proportion of funds we achieve in Japan, because we think it’s an important market and because over time the Japanese have had a very independent perception about Europe, which added value during the European crisis. They never believed the euro could collapse. You could count on them even in tough times, and that’s why they deserve our involvement.

Bryant: Regular roadshows are important. We make sure we are up there on a regular basis. And we are more than happy to continue to update investors whether by conference calls or any other means.

How is the role of regional investors changing?

Purton: It’s not unusual now to see regional investor take-up on a samurai deal of 30, 40, even 50% of a deal. If you go back three or four years, that was not the case: a handful of key accounts dominated. Now you’ve got such diversity that you can go out and market a name to hundreds of accounts, and that’s good.

It does make it difficult for IR work, because how do you access those regional accounts? Logically it’s impossible to travel throughout Japan and meet all of the accounts – there are 47 prefectures and each one will hold a couple of key accounts, but each order may be very small in size. That’s where bookrunners earn their commissions, because they’ve got to make sure they’ve got a well-oiled branch network that can maximize the interest in the samurai credits on offer and get them placed outside the obvious accounts. The branches need to do the legwork for the issuers – that works increasingly well.

Brunerie: We are seeing more regional banks. Maybe they are a little less price-sensitive. They are newer so they have more room for FIG issuers, compared to bigger investors who started to invest in FIG names longer ago.

Green: The empirical evidence is that regional investors are an increasingly important part of samurai transactions. It does seem to be more of a focus on roadshows in the region, and something that we are interested in doing. It helps to provide that granularity that gives deals stability: the more granular the order book is, the more positive it generally is for transaction execution.

And is there a difference in terms of what they want to buy?

Tanaka: We hear from these smaller financial institutions that they prefer floating rate product, and say there is a dearth of floating rate issuance from domestic issuers. Samurai issuance is one of the few ways they can access such instruments.

Yoon: We have seen more demand from regional investors than in the past, and they show more interest in shorter tenor.

So is it fair to say that the market is now less reliant on a finite group of key Tokyo accounts, and that the market is now more mature?

Yoon: I would agree with that. In the past, the core central investors played a critical role in the success of samurai bond issues. It meant that the absence of some key Tokyo investors might affect the deal. I think now there are more chances for issuers – including new issuers – to tap the market thanks to the expansion of the investor base.

Are any issuers considering accessing the market more frequently than in the past?

Brunerie: Not really. It’s not just a question of the market, it’s a question of our global balance sheet, and the fact that the economy is slower in many parts of the world. Like everybody, we have less need for liquidity. We could commit to doing issuance once a year, or maybe every two years, because Japanese investors like faithfulness and commitment – but in terms of size, it could be smaller than in the past.

Yoon: We may access the market more frequently if strong demand exists, and if swap conditions are favourable to us.

What patterns do you expect for the future?

Yoon: Investors are seeking higher yield in these times of low yields and low spreads. Retail investors have consistent demand for high-yield currency-denominated uridashi bonds. In terms of samurai bonds, there is the possibility that high yield bonds will appear more often. However, I do not expect a dramatic shift in investor sentiment given that Japanese investors are more conservative than those in other regions.

Brunerie: If rates and yields continue to remain extremely low, we will see subordinated issuance from foreign banks. It’s already started with Japanese banks. Investors will have to go along the capital structure to get more yield.  

BOX: The return of the Australians

Patrick Bryant of Commonwealth Bank of Australia is just one Australian funding professional who has raised capital frequently from Japan in recent years. According to Daiwa, Australian banks are responsible for 14% of issuance this year, and 17% of total issuance since November 2013 [up to September 3 2014]. After a period of almost two years when the market was effectively closed to Australians because of the basis swap, this is when things started to change.

Commonwealth Bank of Australia reopened the market in November 2013 with a capped Y110 billion three year fixed and three year FRN transaction. Next came NAB in January 2014, raising Y123.8 billion in a three-tranche samurai at three, five and 10-year maturities. Then Westpac raised Y80 billion in a five-year fixed rate transaction in March 2014, followed by CBA’s second samurai in six months in April, with a single tranche Y75 billion deal.