Monday, 24 September 2018

Opening the GATE

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Amidst the ongoing sovereign debt problems in Europe, Japan has drawn the attention of emerging market sovereigns as an alternative funding source, thanks to a guarantee programme provided by the Japan Bank for International Cooperation. Atanas Dinov reports.

In April, the Japan Bank for International Cooperation – the international wing of Japan Finance Corp, the government’s policy based financial institution – expanded its private Samurai guarantee scheme.

The scheme had previously focused on South-East Asian sovereigns, via the ¥500bn (US$5.95bn) Market Access Support Facility, officially introduced in May 2009. The new global scheme, called Guarantee and Acquisition toward Tokyo market Enhancement (GATE), has a broader remit. It allows not only state governments, but exim banks, quasi-sovereign agencies and utilities to apply for easier access to a market that would usually be a closed to them. Even borrowers below investment grade could qualify. JBIC might itself opt to buy a proportion of the bonds, though there has been no official clarification regarding how that would work.  

The programme, where a borrower’s issued principal is guaranteed in full as part of an overall 95% guarantee coverage, has caused a stir. Bankers believe it is likely to lead to quasi-sovereign issuance: some emerging sovereigns with strong economic growth might balk at raising funds under a third party’s guarantee, bankers said.  

JBIC is studying the feasibility of stretching its guarantee to regional, mostly non-Triple A rated, suprnationals, facing funding challenges after the onset of the financial crisis. These entities would encompass regional development banks such as Andean Development Bank, Caribbean Development Bank, East African Development Bank and West African Development Bank, said Fumio Hoshi, an executive director at JBIC. However, this is understood to be low priority, at least for fiscal 2010, with JBIC currently negotiating with sovereigns and more strategic exim banks.

Deals in the making

While the guaranteed programme could become a relevant funding source for EM sovereigns, at a time when developed nations’ finances are under increased scrutiny, there have been no deals under GATE yet. That has prompted criticism from some bankers, though most have dismissed the suggestion that a quasi-sovereign could precede a new sovereign deal.

Mexico is set to be the first sovereign to issue a Samurai under GATE, in October, according to Octavio Lara, deputy general director of debt issuance at the finance ministry. The sovereign is expected to issue a similar deal through joint-lead arrangers Mitsubishi UFJ Morgan Stanley, Mizuho and Nomura. That would follow the example of last December’s ¥150bn 2.22% 10-year Samurai at plus 80bp, which re-established the country’s presence after a nine year hiatus.

The recently investment-grade upgraded Panama is preparing a debut yen issue with a size of at least US$500m-equivalent for the early part of 2011, according to Finance Minister Alberto Vallarino. Rumours indicate Daiwa and MUMSS have been mandated.

Turkey has been in talks with JBIC since March. There is no timeline set for a deal, talked of at a US$1bn-equivalent, but one is expected to materialise, perhaps sandwiched between Mexico and Indonesia. Brazil is also studying the possibility of re-establishing its presence in Japan through a guaranteed issuance.

Welcome to Japan

Japanese investors are traditionally extremely sensitive and very conservative when it comes to headline risk. However, the guarantee scheme has been well accepted. Indonesia gave a vote of confidence to the yen funding route, postponing a benchmark Global dollar sukuk until next year, while striving to maintain its presence in yen. The Republic is also expected to push for a more aggressive pricing on an issue with a size between Rp3trn (US$332.6m/¥28.2bn) and Rp6trn. A deal is scheduled for mid-November through Daiwa Capital Markets and Nomura.

“It makes sense to look at the yen after its strong appreciation this year. It may be cheaper for us to get money directly from the Japanese market instead of trying to raise it locally or through other means and then covering yen needs. It is a natural hedge,” said an Indonesian DMO official.

However, Indonesia’s deal is an old story, as part of the US$1.5bn-equivalent programme under the MASF. It has only issued ¥35bn, with a 2.73% 10-year note priced at plus 135bp.

In another highlight of MASF guaranteed issuance, the Philippines issued the maximum possible, ¥100bn 2.32% 10-year notes in February 2010. They came at 85bp over yen offer-side swaps, close to the low-end of the plus 80bp–110bp price guidance. Competition was fierce, with one rumour suggesting a foreign bank placed an order for the entire ¥100bn deal size.

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