Japan DCM Roundtable: Part 2
IFR: MR Yoshida, Are you getting compensated adequately for the risk you’re taking in the absence of a lot of supply. What are your thoughts around the market today?
MITSUHIRO YOSHIDA, EXECUTIVE DIRECTOR, TREASURY AND INVESTMENT DEPARTMENT, DAIWA NEXT BANK: Well, to start with Europe as Mr Hayashi has said, looking at Japanese interest rates as well as the impact on domestic issuers, there is no real impact. However in this cycle, European issuers are somewhat more cautious especially from Southern Europe for example. Even in the EU there is differentiation among high-grade issuers.
Looking at Japanese corporate bond spreads, they’re tight and from the perspective of fund managers, it’s a difficult situation. Many factors exist behind this. For one, some investors, because of institutional reasons, have no choice but to buy corporate bonds; as they cannot buy Eurobonds or other types of issues. From the supply side, some of the issuers are cleaning up their balance sheet, which reduces the demand for fundraising. Beyond that, the market here in Japan isn’t fully developed. For example, in the US, there is a repo market for corporate bonds but in the case of Japan, it’s not developed to the extent that it is in the States.
As a result, for investors who’ve made the purchase have to hold on it which is more or less the practice we see in Japan and which is posing a major impact.
IFR: And from the issuer’s side, MR Tanaka, what’s your perspective on all of this? I guess it’s fair to say that Rabobank is one of the most sophisticated borrowers out there, and you have a strong investor following. So looking at the market today, is there a good opportunity for you? How is the market environment changing your outlook and your approach to funding?
KAZUHIDE TANAKA, HEAD OF LONG-TERM FUNDING JAPAN, RABOBANK: There are some interesting dynamics at work. Now if I answered your question in full, this conversation would turn into a bond sales seminar, which would be quite problematic from a compliance point of view at this point in time because I do have a deal in the market. [In the days following the IFR Roundtable, Rabobank priced a very successful ¥120bn three-tranche Samurai through Daiwa, JP Morgan and Mizuho]. This attests to the fact that as an issuer I rely on this market. Rabobank is committed to this market and we intend issuing on a very regular basis.
Up to now, we’ve issued on average twice a year in benchmark size and supplemented that with private placements. And so far it’s proven to be an extremely good market for us; very stable and actually very resilient in times of stress. Starting in 2008 and then 2009 in the midst of the Lehman shock Rabobank was able to issue on a non-guaranteed basis while every other bank had to revert to guaranteed bonds.
Therefore I think we would like to continue to issue into this market and therefore I guess the fact that I’m in the market now proves that we like the market.
IFR: Coming to you, MR Suzuki. As a capital markets and M&A lawyer, you see a lot of activity before it comes to market. Can you give your perspective on how you see things at the moment? I’m particularly interested in your views on M&A, which has already been cited as a driver of issuance. What are you seeing?
KATSUMASA SUZUKI, MORI HAMADA & MATSUMOTO: M&A is getting very active, especially outbound acquisitions. Japanese companies buying targets in Asia are increasing in number. In the past, I would say that 70% to 80% were domestic integrations. However maybe 50% of all Japanese M&A today involves Japanese corporations acquiring in Asia and other external markets. With the strong yen, the number of foreign buyers buying Japanese companies is decreasing in number.
Now how they’re going to finance mergers and acquisitions is an area of interest and I’m watching trends. The capital markets, whether equity, convertibles or straight bonds, are now being used, even though it’s a little limited. Companies are still getting loans from the bank in many cases. For one thing, Asian deals aren’t that big. So companies can use cash at hand plus an additional bank loan, which is invariably sufficient to buy the target. And from the institutional point of view, if companies want to use equity or some other capital markets solution, it takes more time.
But companies are also using capital markets as a source of growth capital for Asian activities. For example, Aeon Credit Service recently sold a ¥15.375bn convertible and used the proceeds to fund its Asian activities. So expanding business organically is also a source of capital markets activity.
IFR: Does the panel generally believe that we’ll see more outbound M&A activity? And do you generally believe the capital markets will play an increasing role in funding M&A?
GEN NAKAHARA, BAML: In Asia as well as the US and Europe, Japanese customers are targeting foreign-denominated assets. And of course there is an exchange rate translation impact on the capital required, which is an area of concern for many issuers.
At the same time, there’s a natural trend to have foreign-currency denominated income sources and liabilities. Now because of the JBIC scheme [to make loans to Japanese companies for financing M&A and equity investments in foreign enterprises] M&A activity is not going to be directly reflected in more activity in the capital markets. The linkage is not direct yet.
However Japanese issuers have very good ratings in general and for some time, foreign countries have been Japanising i.e. credit spreads are getting very tight. Looking at this from a dollar-yen translation it’s in our favour. So from the funding method and cost and the general environment, it’s not bad. I think fixed-income capital markets should be leveraged more.
IFR: Thank you. MR Muraki, we’ve covered in quite general terms a few topics. Feel free to make any comment about any of the things we’ve discussed. But I know your particular interest here is the Pro-Bond Market. Can you give your perspective on how you see the Pro-Bond Market developing?
TETSUTARO MURAKI, CEO, TOKYO AIM: Thank you very much for the opportunity. In essence, because it takes time to issue Samurai bonds and you have to translate the documentation into Japanese, Pro-Bonds offer a more efficient way to issue bonds to professional investors, because this issue can be alleviated. In the case of ING - the debut issuer on the Pro-Bond platform – documentation was issued in English without translation and the bonds were issued in Japanese hours. Also, with Pro-Bonds, a central repository can be used and there are a number of additional and novel features.
In the case of Samurai bonds, it’s very difficult to persuade Asian investors to participate, But with the Pro-Bond market, it seems that Asian institutional investors were major buyers of the ING issue because of the English documentation. We’ve only had one issue so far. I’d like to have more issuers on the Pro-Bond platform, so I say to all issuers interested in the Japanese Market, even if you’ve had difficulties in the past, come to the Pro-Bond Market.
The Japanese corporate bond market is the deepest market in Asia, so why don’t you tap this market and broaden it with your participation. We can cater to a new type of credit in Japan but the new market has to be accepted by lead managers. If issuers are able to satisfy relevant criteria, they can issue at good levels. At the very least, issuers can come to the Japanese market with a new option available to tap Japanese investors.
IFR: Why do you think we haven’t seen more issuance to date?
TETSUTARO MURAKI, TOKYO AIM: This is something new. When you embark on something new, it takes time. I think you should pose this question to the lead managers to gauge their point of view as to whether this market is suitable for issuers. I think it’s a question of a sustained marketing and sales effort by us and by brokers, and we have to raise awareness among investors.
So there are multiple elements that need to work in conjunction, At the same time, there is the European situation, which has impacted sentiment and has lingered since the fall of last year. But the main issue is: when you’re trying to embark on something new it takes time, Hidenobu Shirota, Daiwa Securities: Is the Pro-Bond Market an added advantage for players in the Japanese market and for those looking at the market here? I think it’s going to be attractive for issuers that are not frequent players in the Japanese market because Pro-Bonds offer a good way to access an entry point into the market.
So we’d like to promote Pro-Bonds to issuers that are not well known in Japan, including those from Asia, and propose new products and focus more efforts there.
MASANORI AZUMA, NORUMA: I’d say more or less the same. I think it’s going to take some time before Pro-Bonds are more readily accepted in the market. If you look at raising capital, you need to reduce financing risk and that’s going to be very important for issuers. Not too many are going to be willing to go ahead with something new.
Issuers like to take time and will look at how the debut issue is doing. ING did the first issue [a ¥50.7bn two-year via joint leads Barclays, Nomura and SMBC Nikko] and in looking at sentiment on the part of investors and looking at the deal overall, it’s a good system, comparable to 144a in the US.
We believe the Pro-Bond market can be a place for listing, like London for the Euromarket or SGX for the Asian market. The Pro-Bond platform is quite flexible so I’d say we’re going to see the number two issue quite soon.
KATSUYUKI TOKUSHIMA, NLI RESEARCH INSTITUTE: We’ve had lots of discussions about this. Mr Shirota suggested the Asian market would be attracted to Pro-Bonds rather than European issuers and investors. There’s a big driver there. I hope the number two issue will be from an Asian issuer.
But from the perspective of investors, even before the name of Pro-Bond Market came out, we couldn’t see the attractiveness of this market. If there’s a Pro-Bond offering and a public offering, why would we go ahead and buy from the Pro-Bond Market? This was debated very heavily. There has to be a clear cut advantage to attract and lure investors.
Having said that, whether it’s pension funds or other investors, there’s the issue of inclusion in the benchmark Nomura Bond Performance Index. Pro-Bond issues are not included in the BPI universe at present. That needs to be considered for one and we discussed it in detail several years ago. On this point, I was told that the inclusion issue would be considered when the market grows with more issuance. At the same time, I’ve been asking for a plan to set up a mechanism that makes it easier for investors to trade in the secondary market. Based upon those discussions, the Pro-Bond Market started.
This is not just about the first issue. These points should draw more attention and be sorted out as the second and third follow. If the market is further improved, we’d like to completely shift to it from the existing public corporate bond market - that’s what we envisioned when we discussed the launch of the Pro-Bond market before.
Straight bonds and Pro-Bonds are more or less using the same system and I don’t think we need to stick overly to the current system. Rather, I think the ideal situation is to be able to gradually shift to the Pro Bonds with more issues to be made.
But it’s not going to happen overnight. For the time being, we hope that Asian issuers will use the platform. That’s going to be the highest priority.
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