Monday, 20 November 2017

Japan DCM Roundtable: Part 1

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  • Hidenobu Shirota

KEITH MULLIN, IFR:Welcome to the IFR Japan DCM Roundtable. Before we get into the detailed themes of debt capital markets, I think it would be a good idea to get a brief introduction to the fixed-income market from Mr Tokushima.

KATSUYUKI TOKUSHIMA, CHIEF FIXED INCOME ANALYST, NLI RESEARCH INSTITUTE: Thank you. As you know, interest rate levels have remained extremely low, with 10 year government bond yields dropping again below 0.9%. Credit spreads are also extremely tight, especially munis and local agency bonds. Of course, spreads and interest rates are correlated, so for debt investors who want to buy it’s not particularly interesting.

Why? Well, Japanese economic growth is subdued and very low. On top of economic performance in the US, the situation in Europe, especially in Germany, is also a major factor to consider. Bund yields are also very low, owing to the European sovereign crisis, in particular the situations in Greece and Spain. The ongoing sovereign crisis in Europe is a major factor in the situation in Japan’s debt market.

Looking at the Japanese market, the equity market has not really been doing that well in the past month or so, but corporate earnings have been in pretty good shape. Taking this into account, I don’t think we can expect credit spreads to widen anytime soon.

Earlier this month, the NIS Group filed for Civil Rehabilitation Proceedings, but there was almost no reaction in the credit market. The market responded in the same way following Elpida’s bankruptcy filing. Unlike in the past, not even the default of major corporations causes credit spreads to widen.

As to the impact of the higher yen, I’m not convinced that yen bonds are really attractive for foreign investors, in spite of the increased ratio of foreigners holding JGBs (pushed up by Asian central banks and other investors). The yen is so strong now that it could easily return to 78 to the dollar. Given the current forex situation, it’s hard to expect more foreign investors to be willing to buy yen bonds.

On the other hand, for overseas issuers, there’s a great opportunity - several foreign banks are soft-marketing this week for example - because we have low rates and Japanese investors have strong appetite to invest in fixed-income.

ING Bank’s issue on the Pro-Bond Market came with a decent spread relative to standard corporate bonds of the same rating. And as a debut, I think it was quite successful. So with that in mind, I think Japanese debt capital markets are quite interesting at the moment.

IFR: Yes, thank you very much indeed. We’ll discuss the Pro-Bond Market in some detail later. I guess there were some positives in there with some caution around the edges.

I wanted to explore a little with the panel the impact of the European sovereign debt crisis, which by all accounts is going to get worse. I’d like to know how it’s impacting sentiment here in the Japanese market.

Mr Shirota could I ask you to give a few comments about how Europe is affecting sentiment in the market here?

HIDENOBU SHIROTA, HEAD OF DCM, DAIWA SECURITIES: Japanese officials and politicians initially played down the impact of the Lehman crisis but it’s actually related to the situation today. The European crisis is influencing Japan. Risk-off and risk on are alternating in our market as a result of what European sovereigns are doing. Since April, we’ve been in quite strong risk-off mode and in the primary markets, the Triple B segment, the segment for low-rated issuers, has been quite difficult.

But on the other hand, utility issuers have been out of the market; Tohoku Electric Power is issuing bonds, but other than that, power companies with nuclear power plants haven’t been active in the primary market. There have been some redemptions but even taking cash redemptions into account there’s a glut of money and investors don’t have anything to buy.

And also with the excess of bank deposits over loans expanding, more funds are flowing into the capital markets. Even though we’re in risk off mode thanks to the European situation, supply and demand dynamics suggest there is more demand but as Mr Tokushima stated, spreads continue to be quite tight in this market.

So we’re in risk off mode as a whole, but in reality you have to buy something and that’s the current situation. On the other hand if you talk about Samurai bonds - Tanaka-san from Rabobank might feel this very strongly - investors are being very selective in what they’ll buy. Generally, European financial institutions are a very difficult investment target for Japanese investors at the moment, but Rabobank and other Northern European banks as well as Korean issuers are very much in demand by investors. Investor behaviour will continue to be quite picky in selecting the right issuers from a creditworthiness point of view, as we’re in a difficult situation.

While the impact of what’s happening in Europe may not be direct, Japanese investors are closely monitoring the credit situation outside of Japan. And they’re going to be quite aggressive in taking on credit risk from outside of Japan. That’s a trend that I’ve seen in the past six months or so.

IFR: Mr Azuma, do you agree there’s going to be a bit of a supply-side issue here as opposed to a demand-side issue. In other words, is demand outstripping supply in the capital markets?

MASANORI AZUMA, HEAD OF DCM, NORUMA: Looking at supply and demand with a focus on the domestic fixed-income market in Japan, I agree that investors are getting extremely selective. As Mr Tokushima mentioned, buyers’ selectivity screens are very stringent. But if you go through that screen I think you have a very good environment for issuing fixed-income products. Credit spreads are historically extremely low and as Mr Shirota pointed out, with regard to Samurai bonds, the recent volume of issuance and the number of issues have been increasing. With regard to the future of the Japanese market compared to the foreign market, if you issue benchmarks, an additional spread over secondary spreads is required in overseas markets.

However concessions are extremely limited in the Japanese market. In some cases primary market spreads are almost at the same level as secondary market spreads because supply and demand are in a very good situation, in my opinion.

Having said that, I don’t know how long this situation will continue. And looking at the Japanese domestic market there is not much demand for Triple B or Double B paper. Corporate bonds, for example, are few and far between; the market is not very deep.

So depending on your criteria, it’s a good environment for selected issuers.

IFR: MR Nakahara, do you agree that it’s an issuer’s market? If so, why aren’t we seeing more credit product? If there’s no spread concession and you’re a well-known borrower, this is a great environment, isn’t it, especially when investors are starved of supply with too much cash to invest? The dynamics seem to be quite positive so why aren’t we seeing more?

GEN NAKAHARA, HEAD OF CAPITAL MARKETS, BANK OF AMERICA MERRILL LYNCH: Basically, with regard to current issuance levels, especially for domestic bonds, they’re not increasing much, especially with the power companies out of the market at the moment. Annual issuance levels would be ¥1.3trn to ¥1.4trn in ordinary times. But nobody is filling that gap at the moment.

Looking at the overseas market, yes there are some drivers. In fact, there are two factors. One is low interest rates, which is pushing some issuers to refinance earlier rather than later. The other is the large-scale M&A we’re seeing at the moment. Of course in part it’s the banks that are extending loans to finance M&A rather than the capital markets. So while these two factors are drivers for capital markets issuance, by the same token, they’re not powerful drivers. The banks are financing most of the M&A; not much is sourced from the bond market. And the low interest-rate environment will be here for some time, so issuers don’t need to be too hasty or unduly accelerate refinancing plans.

So in looking at the motivation and factors for issuance in Japan, it’s not that there is insufficient reasoning. As you point out, as an environment for issuance it’s very favourable. Unfortunately, issuers aren’t being forced into the market to source funds. After the Lehman crisis, they moved quickly to make sure they had sufficient cash at hand. At the same time, they had some concerns about indirect financing. That’s not true in this environment, thus from the perspective of issuers they can do it when they need it in the way that suits them best.

IFR: OK, thanks. So let’s ask a similar question to the investors on our panel. I’m curious to understand the mindset of investors in this market. MR Hayashi: could I ask you to make some comments from the investor side? How you see the market? Do you like the levels you’re being shown at the moment?

HIROAKI HAYASHI, GENERAL MANAGER, INVESTMENT DEPARTMENT, FUKOKUSHINRAI LIFE INSURANCE: First of all in regard to the European sovereign crisis, I’d like to share with you how investors look at it. To be honest, I would say there’s hardly been any direct impact in the Japanese market. Having said that, with the European debt crisis as a trigger, the stability of JGBs and of yen assets in general have come to the fore once again.

And with the trigger of the European sovereign crisis, there’s been a rapid deceleration in economic growth globally. So looking at interest rates at present, because of the strong yen and the stability of JGBs, there’s no need for anyone to be uneasy about rates. Furthermore in regard to spreads, it’s true they’re tight. Then again, supply is low so unless it’s a bond of a certain grade, in looking at the supply and demand situation, spreads are going to be tight. As investors, we like to have higher returns but in looking at prevailing spreads, we feel that the current scenario is something we need to acknowledge.

But because of the European sovereign crisis, there is a liquidity premium and I’d say that this is going to be one way to chase spreads. For example, you can enjoy quite handsome spreads in power company bonds in the secondary market at the moment. If it’s a shorter-dated bond, it’s quite attractive for us. In addition Samurai bonds and other bonds sold by overseas issuers are going to offer attractive spreads. So I think these are going to be the interesting points for us.

IFR: Do you feel tempted to move down the credit curve to generate some extra return, looking, for example, at Triple Bs and below?

HIROAKI HAYASHI, FUKOKUSHINRAI LIFE INSURANCE: As long as there is a handsome spread we’d be interested in making investments in the lower echelons. Unfortunately I would say that there’s not enough spread to make it interesting for us. Triple B bonds are available in the market and there are some that you can feel comfortable with but those are the ones that are going to offer a tighter spread. Therefore to us it’s not that attractive. If it’s a Triple B, it has to pay a spread that’s tantamount to Triple B status.

Because of that, I would say they are not interesting enough to go after from our perspective as things stand. This is not an environment in which to take risk, so we will always be more interested in higher-grade bonds. Whether it’s Samurai bonds or other forms of issuance, those are going to be more stimulating options for us.


To view the Digital Edition version of this Roundtable please click here.

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