Japan 2007: The land of Samurai
It has been a year of two halves for the Samurai bond market. Next to nothing in the first few months; boom-time after that. The market continues to feature the kind of enormous liquidity that dried up elsewhere in the summer credit crunch. And while the pricing on offer has widened, it still represents good value for borrowers. Atanas Dinov reports.
The offshore yen bond market began the year sluggishly due to concerns over the new US regulations and possible interest rate rises and only five deals were done by the middle of the year. But then the market then took off as international banks returned. The sub-prime crisis had much less of an impact on Japanese markets than those elsewhere, resulting in a wave of renewed liquidity and a rush of foreign supply as investors proved they were still amenable to bond issuance, albeit on different terms than before.
Restrictions on US Samurai issuers remain in place but a resolution to these restrictions could be near. Although international banks stormed the yen market between May and June, and then again in September – with a November rush also thought possible – there was hardly any corporate issuance, with the minor exceptions of deals from Aflac and HSBC Finance Corp. Nevertheless, a banker familiar with the current regulatory developments said a corporate name could emerge before the end of the calendar year through a new exchangeable structure.
Last year was unusually quiet due to the stand-off regarding Japan’s new paperless book-entry transfer system , which had forced major US borrowers such as Citi, Bank of America, and GECC out of the Samurai market for the best part of a year. The compromise regulations that were reached limited US Samurais to a 10-year maturity with the issuers having to provide proof that the bonds were sold only to non-US accounts through the foreign-targeted registered notes structure.
In February, Merrill Lynch (Aa3/AA–/AA–/AA) broke the 2007 US standstill with a ¥95bn dual-tranche five-year consisting of a ¥70bn fixed tranche and a ¥25bn FRN. Both priced at 17bp over yen Libor. Later in the year, and prior to the credit crunch, Merrill returned with a ¥55bn 10-year subordinated offering at the then-generous spread of 45bp over Libor.
In May JPMorgan Chase (Aa2/AA–/AA–) warmed up the market with a ¥160bn four-trancher. It launched a ¥45bn five-year fixed note, priced at Libor plus 12bp, a ¥45bn five-year floater paying three-month Libor plus 12bp and a ¥30bn seven-year fixed piece at Libor plus 18bp.There was also a ¥40bn 10-year subordinated tranche priced at 30bp over Libor.
Lehman Brothers (A1/A+/AA-) then tapped with its biggest-ever Samurai, a three-tranche issue divided into ¥56bn fixed and ¥50bn FRN five-year notes at plus 23bp and a ¥22bn 10-year tranche at plus 34bp.
But it was in June that Citi (Aa1/AA/AA+) delivered the standout trade. Although widely rumoured as coming with a large multi-tranche transaction, it still managed to surprise some bankers with its massive, six-tranche, record-breaking Samurai, followed a day later by three more Global yen tranches.
In the three-year maturity the bank printed ¥30bn in fixed and floating formats with pricing of 6bp over Libor, in the fives it sold ¥35bn in fixed and ¥30bn in floating debt at 11bp over, and this was followed by ¥80bn in sevens at 17bp over and finally a ¥65bn 10-year at plus 20bp.
The fixed-rate Global yen concentrated on longer tenors that were not allowed under the Samurai format: a ¥50bn 20-year was priced at mid-swaps plus 24bp, a ¥55bn 30-year at 30bp and a ¥40bn 40-year (the first ever) at 32bp.
It was widely believed the funding was destined to pay for Citi’s move to increase its stake in Nikko Cordial. The US bank upped its stake in that business to 68% at that time.
Bank of America (Aa1/AA/AA), seeing that the good demand has not disappeared, followed with yet another gigantic multi-tranche Samurai – a ¥215bn deal. Unlike many of its US peers with large operations in Japan, it has limited distribution networks and teamed with Mizuho and Nomura to take the advantage of their domestic placement capabilities.
It issued ¥75bn in fixed and ¥55bn in floating notes in five-years at 11bp and ¥40bn senior and ¥45bn subordinated issues in the 10-year tenor, with respective spreads of 19bp and 28bp.
Several issuers preferred the non-Samurai format. Examples included Morgan Stanley (Aa3/AA–/AA–/AA), with its ¥58bn five-year FRN and seven-year fixed note Euro-yen deal.
Regardless of non-Samurai formats, June was the hottest-ever month for yen issuance, with Samurai volumes alone reaching ¥699bn from eight issuers. The strong appetite from mid-May until the end of June produced a record amount of Samurais with ¥1.037tn of paper issued.
The market took it all in its stride, however. “The massive issuance did not crash the market, the spreads did not widen,” said a banker at a leading Samurai underwriting house.
Multi-tranche issues were seen from virtually every US bank. "The multi-tranche Samurai issuance was a feature of the Japanese market and is absolutely necessary for large issues," said Brian Mccappin, Nikko Citi’s co-head of fixed income. “Multi tranches with various tenors are needed to reach across the yield curve to a unique bucket of investors.”
There is, of course, sound reasoning behind this decision that extends beyond the desire just to diversify into a different jurisdiction and a fresh set of investors, and that is to ensure that no sector remains untried. "For example, five-year fixed and floating issues are bought by different types of investors. There is no cannibalisation of tenors as seen in the euro or [US] dollar market. In Japan there is a fragmented liquidity landscape," said Mccappin.
Going to war?
While European and US markets remained volatile, primary bond spreads in Japan widened much the same as elsewhere – in fact, they doubled for many domestic names – but investors remained willing to buy.
On the back of the sparks of recovery first seen on the domestic front in the first week of September, a record amount of primary bonds were issued. The Japanese credit market was moving forward, and global financial institutions were quick to seize the opportunity to tap into the high levels of liquidity available.
“So much selling has been going on – as if people are going to war,” said one asset manager on the vast numbers of new deals. “This is abnormal – not in a bad way – but because it is rare. People are actually buying the bonds.”
Data from Thomson Financial underlines this intensity: ¥1.11trn of primary domestic straight bonds appeared in July, ¥328.9bn in August and ¥1.16trn in September.
On the international yen side, September started with high issuance volume underlining the yen market’s resilience, however, most of these new issues were not in the Samurai format. The Japanese market offered fund-raising possibilities throughout, although a hefty premium was demanded in return.
Citi re-opened the yen market for international issuers with its ¥250bn five-year Global floating-rate-note priced at 45bp over Libor, considerably wider than its June five-year Samurai which came out at plus 11bp.
Morgan Stanley followed with a ¥40bn five-year Euro-yen, comprising fixed and floating parts and pricing at 65bp over Libor. Only a day later a gigantic ¥200bn five-year Euro-yen FRN emerged with a 5bp premium on top of the earlier trade, bringing the spread to plus 70bp.
Bank of America trailed its American peers with another enormous single-trancher, a ¥230bn five-year floater. This priced at 45bp over three-month yen Libor.
However, in between these American non-Samurai transactions, Deutsche Bank and RBS emerged to take advantage of the funds on offer, both concentrating on domestic buyers. Deutsche Bank (Aa1/AA/AA–) printed a ¥147bn three-tranche Samurai. It sold ¥57bn of five-year fixed paper and a ¥60bn floater, both at 45bp over Libor, and a ¥30bn 10-year fixed piece at plus 55bp.
Eschewing the burdensome documentation procedure of the Samurai format and opting for the quicker Euro-yen, RBS (Aa1/AA/AA) issued a ¥100bn five-year at 45bp over Libor. This marked its debut in the Japanese market and around 90% of the bonds were sold domestically.
Two other successful Samurais followed, leaving a strong tailwind behind them. Korea Development Bank’s (Aa3/A/A+/A+) ¥60bn dual-trancher, comprised a ¥27bn three-year led by Mizuho and a ¥33bn five-year arranged by Mitsubishi UFJ, priced at 40bp and 50bp over Libor, respectively. This compared to a May issue where the bank only paid 18bp over Libor for its five-year tenor.
Barclays printed a ¥140bn five-year, split into ¥50bn of fixed and ¥90bn of floating notes. Both were priced at yen Libor plus 40bp, considerably wider than the Libor plus 7bp achieved on a ¥50bn five-year Samurai in December 2006. Spreads were starting to tighten, but what Barclays offered was considered attractive by most investors.
The numerous regional financial bodies in Japan have been pointed to as major buyers of FRN product, especially from American banks, which are well-recognised credits.
Some regional buyers are beginning to hanker for non-financial names. But more banking paper could be on the way. "Issue sizes are enlarged as the banks need the money to support balance sheets, ABCP conduits and leveraged loans that they could not place in the market," said Tetsuo Ishihara, senior credit analyst at Mizuho Securities, on the significant sizes of the recent issues launched amid still shaky global markets.