Euroweek Japan report: samurais and uridashis

Euroweek: Japan capital markets, October 2011

Samurais and uridashi

Yen issuance is offering attractive and robust funding for foreign issuers, but local investors are likely to be picky about the names they invest in.

The samurai market has proven resilient this year. By September 16, according to Dealogic, 25 samurai deals had raised $17.46 billion equivalent in 2011 to date. And the pipeline appears to be healthy. “Samurai is the market that stands out as being very strong this year,” says Alexandre Sautour at BNP Paribas. “It is to some extent a consequence of the fact that after March, domestic issuers have stopped issuing, and investors are keen to put their money to work. Samurai issuers have taken advantage of the lack of domestic issuance.” This is partly a consequence of the fact that domestic utilities, normally a considerable part of the market, have not issued since the earthquake, while it becomes clear what policy will be around nuclear power.

A look at the top 10 deals year to date (see chart) shows a number of US and European banks among the top 10: HSBC and JP Morgan have accounted for the biggest deals this year, while Rabobank Nederland (twice) and Sweden’s SBAB have also been active. But all of those deals came since May, and since then toxic sentiment towards western markets has prompted some US and European issuers to rethink, such as Bank of America, which pulled a samurai in June, one week after Societe Generale had done the same. Instead, attention has focused upon two pockets of issuers: Korea, and Australian banks.

“There’s been a fall-off in issuance from the US and European bank sector which normally dominates the issuance league table,” says Theodore Lo at RBS. “Now that’s gone, there is extra cash that can be put elsewhere, and that opens an opportunity for other issuers. The Koreans and Australians have been the beneficiaries.”

In September Korea Finance Corp raised Y30 billion ($391.6 million) in a three-tranche samurai including a Y15.5 billion two-year bond, Y7.5 billion three year and Y7 billion five year. All priced at the tight end of guidance, and the five year note was added on the back of investor demand.

The deal was representative of continuing appetite for Korean names. The biggest so far this year was from Kexim, which raised the equivalent of $994 million in June. Others have included Hana Bank, which raised 30 billion in a dual-tranche Samurai in August, while Posco and KDB have announced transactions for October and IBK is also expected to issue.

Australians, too, have enjoyed diversification and cost-effective funding in yen this year. Both Westpac and Commonwealth Bank of Australia have launched Y100 billion deals this year, in August and June respectively, while ANZ and National Australia Bank have also launched in decent size.  All four banks are believed to have hit their yen funding targets for the year but could be tempted to come back to a welcoming investor base; on Westpac’s most recent deal, for example, a Y74.4 billion five-year fixed rate note had its guidance revised inwards, and then came at the tight end of that amended range.

At the heart of this flurry of Korean and Australian paper is a coincidence of interests. “The samurai market continues to provide attractive opportunities to Japanese investors,” says Reiko Hayashi at BAML. “For international issuers, the market provides investor diversification, and the cost can be competitive against other markets.”

Seiichiro Miyaoka, head of debt capital markets at UBS, adds: “The spread on samurai  bonds  is much wider than  those of domestic corporate bonds. That is very attractive for Japanese investors.” For issuers, “the Japanese market is still stable and resilient   vis-à-vis other funding markets like the US, which is one reason  samurai  borrowers are still looking at the samurai as a funding market.”

Still, the market is not completely shut to others. Bank of America Merrill Lynch recently announced a mandate from Scandinavia’s Nordea Bank to launch an inaugural samurai bond. “However, given recent concerns towards the European situation and global economic slowdown, Japanese investors are becoming more selective,” says Hayashi.

Sautour agrees. “At the moment I think there is less appetite for European issuers, and many will not be able to come to the market under the current environment. There is always a price at which people are able to issue, but I don’t think they would want to pay the spread that would be needed for printing.” Many investors say they are not allowed to invest in European names because their volatility is so high. Still, bankers say that Japanese investors do differentiate between different European states; Scandinavia and the Netherlands, for example, are still considered largely remote from eurozone problems.

There is a separate class of samurai issuance: those carrying a guarantee from JBIC, who are mainly emerging market sovereigns. Turkey launched a Y180 billion 10-year guaranteed note in March; in recent years most other issuers have been Latin American or Southeast Asian, among them Indonesia, the Philippines, Mexico and Brazil. A JBIC guarantee could perhaps provide a way in for European names; in the meantime Colombia is expected to be the next guaranteed sovereign issuer.

Uridashi tranches tap into the same opportunity that samurai issues do. “Japanese investors need to buy something attractive. The domestic issuance is very boring because of the tight spreads,” says Hayashi. “So a good international name can be acceptable to retail investors.” Masayoshi Tezuka, director and  head of Japan debt syndicate at RBS, says “the uridashi market is the hottest market in Japan right now: many issuers manage to price bonds at the tightest level compared to other markets.”

But uridashi issuance has declined in recent months as interest rates have come down in some higher yielding currencies, and because of volatility. According to Dealogic, the 10 biggest uridashi deals of the year – led by deals from Nomura Europe Finance and RBS – all came by June 15, with all but two of them by April 8.

“But on the private placement side we see a relatively healthy stream of business,” says Sautour. “In euroyen in particular, there is still demand for credit, though it’s obviously very selective.”

It will be interesting to see the impact when utilities do return to the domestic market and suck up some of the demand that is now going to foreign names. “We don’t really see anything coming anytime soon,” says Sautour. “There’s still a debate about energy policy which is putting a lid on the ability of issuers to come to the market; the CDS market remains fairly wide and investors are really not willing to return to that segment just yet.”

One market participant, though, expects a utility to come to market “next month [October], or November – before the end of the year. They’ve got to refinance.” Despite the high CDS levels, he thinks it would tighten very sharply and that the right issuer could probably launching at JGBs plus just 40 or 50 basis points at the moment.

It’s certainly true that utilities can’t stay out of the market forever, and when they return, their volumes and their reception will have knock-on effects throughout the yen markets.

BOX: How developed world heavyweight issuers view Japan

For top-drawer international issuers, Japan represents a vital part of their investment constituency – if not always in yen.

“Our conversation on yen-denominated issuance is going to be very short: we haven’t done any this year,” says S Dhawan at European Investment Bank in Luxembourg. “The yen basis swap has grinded out to levels that would make pricing on new issue unattractive for yen investors. For us to issue at competitive levels to our issuance in euros or dollars, we would come out in yen at sub-JGB levels, so clearly domestic investor interest would be somewhat limited.” In previous years, EIB has generally found a window for yen issuance, through a global yen, euroyen or samurai issue, but this year has provided no such opportunities.

That’s not to say, though, that Japanese investors aren’t enormously important for EIB and similar institutions. “We access Japanese investors across a range of currencies, structures and formats, be they global bond issues, EMTN, samurai or uridashi. We offer a recognisable, triple A supranational name and they account for a substantial proportion of our investor base.”

As Dhawan says, “there is no investor base you can reach in more ways and through more different approaches” than in Japan. Different products give access to different parts of the investor base. Larger, liquid global bond issues go to large banks and money managers; issues in higher yielding currencies like Brazilian real, Turkish lira and Australian dollars go to yield-hungry retail mutual funds and insurance companies. Uridashi issues go to high net worth individuals and retail investors of Japanese banks, and samurais tend to go to domestic institutional investors.

KfW has been more active in yen, and has been particularly busy in uridashi issues, although that is across a range of currencies. “That has been a very strong market for KfW this year,” says Alexander Liebethal, head of new issues, structured notes and private placements. “Investors are looking for yield enhancement in a very volatile market. We have done almost 30 uridashis this year, and are approaching an amount of Eu2 billion equivalent.” In previous years, the total has usually been closer to Eu1 billion. KfW has also conducted 45 private placements in yen this year, “typically a reverse inquiry-driven market,” says Liebethal.

EIB says it has tended to issue more plain vanilla style uridashis than structured ones, but notes that since recent changes in Brazilian regulations, a large part of the market, in popular BRL, has now fallen away.

While Japan’s safe haven status is generally more relevant to investors than issuers, it does have the effect of making Japan’s investor base stable. “Over the past 12 months Japanese investors have continued to be active in the dollar and euro market,” says Horst Seissinger, head of capital markets at KfW. “We would expect to continue to see solid placement of our euro and dollar bonds, as well as Australian dollar bonds.”

“My impression is that Japanese investors are very reliable, at least if it comes to our name,” says Liebethal. “They seem to be in favour of a German credit offering a bundle of different products with opportunities for yield enhancement. Even after the earthquake there was not a pause in our issuance activities.”