Japan DCM Roundtable: Part 3
IFR: MR Suzuki I know you have some thoughts on this so perhaps you would like to share them with us?
KATSUMASA SUZUKI, MORI HAMADA & MATSUMOTO: Legally speaking, the Pro-Bond market is something really new and innovative. No disclosure based on the Financial Instruments and Exchange Law is needed. If you write that you have already issued a Japanese securities report, that would suffice. If you look at the example of ING, just like how it’s done in Europe, the offering circular and the programme circular would suffice as documents. In that sense, legally speaking I think it’s a drastic change, and I think it’s going to offer a lot of opportunity.
IFR: Is it an opportunity shared by investors?
HIROAKI HAYASHI, FUKOKUSHINRAI LIFE INSURANCE: As Mr Tokushima has said, Pro-Bonds will make new products available. That’s the impression we get, which is important. But compared to existing Samurai and Eurobonds, it doesn’t seem as though Pro-Bonds will be more attractive than the other two. I’m not saying that it’s bad; the ING issue came in size and was short-dated and I evaluate it highly.
But in order for the Pro-Bond market to further improve, it needs to be managed more efficiently so that costs are reduced. That will enable more spread to be offered to investors.
As a result, we hope that Asian and non-Japanese investors will be interested. If we’re talking about the Samurai market for domestic investors only, spreads are going to be tight. But if we have foreign investors come into the market, then
I would say that spreads are going to become more generous and as a result more investors will be more forthcoming in making investments. This needs to be considered, I would say. If this happens, it’ll be a good market. We have high expectations.
MITSUHIRO YOSHIDA, DAIWA NEXT BANK: I have expectations, too. It’s a new market that was just established. I don’t harbour any uneasiness just because it’s new. And as was said by others, compared to Samurai bonds for example it’s going to be non regular issuers coming into the market. This means that the options for investors will expand, which translates into expanded opportunities for us.
KAZUHIDE TANAKA, RABOBANK: What are my views on the Pro-Bond Market? I wish it all the best. Frankly as an issuer, the bigger the market, it benefits me and it benefits everyone. If you look at the Samurai market as a whole it’s probably a ¥2trn market per year on average for the last I don’t know how many years. If the Pro-Bond market can assist in creating a larger foreign credit market in Japan, I’m all for it. The more players there are, I think there’s more liquidity and of course on the investors’ side you have more credit analysis. And in that regard, point number two is if you have more people looking out for foreign credit in Japan they’ll realise the strength of the Rabobank rating which benefits me. Therefore for me it’s a win-win situation.
IFR: Moving on, one of the things I did want to touch on was municipal bonds as a potential area for bond issuance. MR Nakahara: do you see opportunities there? Do you think foreign investors might be attracted into the muni bond market if it were perhaps slightly broader or it were perhaps constructed differently?
GEN NAKAHARA, BAML: With regard to the potential capability of the muni market, the universe now consists of 52 issuers as of this year. Bearing in mind the fiscal situation in Japan, municipal governments are doing more and more of their own funding, a trend over the past several years. In the past, issuance via a syndicate of underwriters was the style but now more and more deals are issued in the form of lead-management and the terms are also diversified.
Mind you, spreads are quite tight, but you do have options for tenure and there’s also a deeper market in terms of issuance. I think it’s about ¥6trn, which is almost equivalent to the corporate bond market. Now in looking at investor portfolios. I think the importance of munis is increasing in asset allocation.
These are all strengths, but from the underwriters’ point of view, how you differentiate one muni from another is a big issue. Looking at the local government set-up in Japan, it’s very difficult to differentiate one municipality from another. Of course, muni issuers endeavour to project their creditworthiness and go to great lengths in their marketing activities. However, it’s not really diversified. This market has potential growth capability in the coming several years but the issuers are not yet differentiated.
MASANORI AZUMA, NORUMA: The local government budget situation is much talked about, as is whether they need funds or not. I think municipal authorities are running tight budgets so they do need more funds. That means that muni bond issues will increase in future.
Looking at the muni market from the perspective of investors, they believe it’s almost risk-free. Is a muni credit a credit per se? I think there’s a sense that muni bonds come with an [implicit] central government guarantee. It’s not really clear whether more delegation of power will take place to local governments from central government. This is part of the discussion we have to consider.
Central government is looking for smaller government so if it’s delegating more power to the local governments, I think creditworthiness of the munis will receive more attention. So I do think there will be a deeper market for munis. If not, if the current system and scheme continues without the delegation of power to municipal governments, then I think munis are almost equivalent to JGBs even though they’re called munis. All of that said, the muni market itself will continue to expand in the several years to come.
IFR: Are these potentially cheap JGBs, JGBs with a bit of spread? Is that how you might look at them, Mr Hayashi?
HIROAKI HAYASHI, FUKOKUSHINRAI LIFE INSURANCE: Muni spreads are extremely tight. Take an example: Tokyo Metropolitan Government offers almost zero spread pick-up at the moment. For investors, the bigger the spread the better. But looking at the Japanese situation, there is a fiscal adjustment in place so the municipal budget of each local government can’t be really evaluated on a stand-alone basis.
Local governments are almost equal to central government and JGBs. That is the viewpoint of the market and that’s how they are operated and managed as well. So you end up with very tight spreads. I’m not at all happy with the situation, but that’s the reality we have to face. Now as for munis in the future, more delegation of power from central government to local government is the trend and that will be accelerated. Therefore the muni market will grow, and JGBs to munis will also be a trend.
Size will shift from JGBs to munis. And you know in that process if there is additional spread, I’ll be more than satisfied. But it’s very difficult to see any sudden widening of current tight spreads. From an investor’s viewpoint, even if it’s a smaller addition of spread we like to go for it. We are going to be very active in the muni market in the coming years.
IFR: Munis are also interested in diversifying their funding. Osaka, for example, was looking at doing an FRN. You also see munis looking at offshore markets. But can they really go abroad to issue, say, in US dollars and gather demand from foreign investors? Would Japanese investors participate in foreign currency denominated issuance?
HIROAKI HAYASHI, FUKOKUSHINRAI LIFE INSURANCE: Before answering the foreign currency point, it’s worth pointing out that the tenure of muni bonds, which used to be quite limited, has become much more diversified recently. You’re getting five, seven, 10, 12 and 15-year paper, Foreign currency issuance is very much in the future. It’s not around the corner. Most of the issuance today is at the short end. So you start with yen paper of different maturities, maybe with a floating or different coupon level. Once the market is diversified in yen, the next step is issuing in foreign currencies.
I think there is a need for diversification among investors. Fifteen-year bonds have been issued more and more, to the point where the market has become overheated. This was a maturity gap that investors were very focused on and it was a vacuum that had not been filled. Such diversification should continue. That will be the way forward. I think issuers will have greater funding needs and I think they’ll figure out what the best structure is to meet the requirements of investors. How the market develops will be much more reflective of that.
IFR: MR Yoshida would you buy foreign currency denominated muni bonds?
MITSUHIRO YOSHIDA, DAIWA NEXT BANK: If the spread is attractive, yes. There’s an opportunity for us to go forward. Japanese issuers such as trading companies and others are issuing in foreign currency so if the yen dollar basis is attractive for issuers, they’ll go ahead. It all depends on the spread. If you issue in foreign currencies, you need to promote to foreign investors as well.
If you look at spreads on yen-denominated bonds, as has been said throughout this conversation, they’re quite tight at the moment. Whether this continues for ever who knows, so offshore issuance may become more attractive for issuers. It just boils down to whether attractive spreads are available or not.
IFR: MR Tokushima: where do munis fit into your universe? And a second question following on from the last comment: what are your expectations for the yen-dollar basis swap?
KATSUYUKI TOKUSHIMA, NLI RESEARCH INSTITUTE: Well there’s one issue we need to consider here: there’s no need for dollars on the part of Japanese municipalities. If you look at the swap basis, it might be an attractive scenario, but municipalities aren’t going to utilise derivatives. So the securities houses need to put the right structures in place and package securities in a way that would be acceptable to municipalities because prefectural assemblies are sensitive to derivatives.
In looking at the yen-dollar relationship, if you look at short-term and long-term interest rates between the US and Japan, there could be as some spots in which the basis swap is going to look quite attractive. So operating companies in Japan could issue in dollars and convert to yen and wouldn’t feel any uneasiness. This could be used in a flexible manner, which would be appreciated by the market.
But if I go back to the munis, it’s clear that public subscription levels are on the increase while bank loans are seeing a gradual decrease. As the banks purchase JGBs, publicly-offered munis will be attractive. There are only around 50 issuers and 19 government-designated cities and many prefectural governments still haven’t offered bonds publicly, so there is room for further expansion in bond issuance.
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