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Monday, 23 October 2017

Samurais carve a niche

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  • Samurais carve a niche

The Samurai market remains open for the right FIG names, but investors are being more selective on a credit-by-credit basis.

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Despite declining sentiment around the eurozone and the difficulty of selling paper, some financials have seen the advantages of the Samurai market. For the right names, the Japanese market has been open.

The year certainly started well for European names. January saw DNB Bank sell its debut Samurai offering, a ¥65bn (US$837m) five-year bond fixed at Libor plus 140bp via Daiwa Capital Markets, Mizuho and Nomura. In June, Nordea Bank sold the largest debut Samurai offering since the collapse of Lehman Brothers. It beat expectations of a ¥100bn debut and in the end sold an impressive ¥120.2bn multi-tranche deal.

The Samurai came out split into a ¥15.9bn 0.96% three-year tranche priced at yen offer-side swaps plus 55bp (85bp over JGBs); a ¥8.5bn four-year floater at 70bp over three-month Libor; ¥85.3bn 1.2% five-year note at plus 72bp (96.5bp over); a ¥4.9bn five-year FRN paying 87bp over; and ¥5.6bn 1.75% 10-year tranche printed at plus 82bp (86bp over).

“Appetite for the right European FIG names is most definitely there and in large size, but investors are becoming more selective on a credit by credit basis. There is a level of sophistication not seen 10 years ago,” said Vince Purton, head of DCM at Daiwa Capital Markets Europe.

Hybrid market

What has helped is that the Japanese market has been going out of its way to court new issuance. Japan’s new professionals-only bond market, the Pro-Bond market, was created to emulate the 144a and EMTN markets in the US and Europe.

“It was designed as a hybrid Samurai from the euro end, but adopting Japanese law and Japanese settlement,” said Kenji Setogawa, head of debt syndicate at Barclays in Tokyo.

It was opened in April this year by ING, which sold a ¥50.7bn 1.4% two-year deal at yen offer-side swaps plus 100bp, equivalent to 128.5bp over JGBs. Although the bank paid a premium to euro funding, it came both flat to where a Samurai would have priced and, significantly, inside a US dollar deal.

Although there have been some complaints about the format, mostly in terms of liquidity and distribution, they are outweighed by the advantages. Chief among those is that unlike Samurais, the Pro-Bond does not require borrowers to translate documents, or indeed ongoing disclosure, into Japanese, which makes for quick execution. The hope is that the format will attract regional investors which are limited as to where they could place their money.

While the market is always going to be niche, interest was piqued again in August when Nomura indicated its intention to look at the market when it registered two of its subsidiaries. Both programmes are US dollar-denominated, with Nomura Europe Finance listing a US$40bn programme and Nomura Bank International a US$12.5bn one. And a further couple of names are rumoured to be looking at the format.

Korean festival

What has dominated the Samurai market so far this year is South Korea. So much so that the country is likely to take second place to Australia in overall Samurai bond issuance this year.

The drive to print in Samurai format is not just coming from the issuers. “For historical reasons, Japanese investors are familiar with Korean names. We are also seeing issuance with tenors of 18 months to two years. Domestic banks don’t go that short. So from an investor perspective we often don’t have any other alternatives than Korean names,” said Takaomi Tahara, head of international debt syndicate at Nomura in Japan.

In May, for example, Export-Import Bank of Korea sold a ¥100bn three-part Samurai, the largest Asian ex-Australia yen offering. By July, participants hailed the month as a Korean festival, and supply hit ¥259.7bn from 17 issues. To give an idea of scale, that month boosted 2012 volumes to almost 70% of the amount raised in the whole of 2011, according to Thomson Reuters data.

The month opened with Shinhan Bank which sold ¥35bn dual-tranche paper, a two-year tenor at yen offer-side swaps plus 93bp and a three-year piece at plus 103bp. It closed on July 26 when Hana Bank sold a ¥30bn 1.27% two-year at the equivalent of JGB plus 117bp via Citigroup, JPM, Mizuho and Nomura.

What makes these deals stand out is the pricing. Korean Development Bank, for example priced ¥30bn bonds incredibly tightly and well inside those of peers like Export-Import Bank of Korea. It priced a ¥21.2bn 1.05% two-year tranche at yen offer-side swaps plus 65bp, a ¥5.1bn 1.17% three-year at plus 77bp and a ¥3.7bn five-year at plus 85bp. It went for a smaller size (¥50bn had been expected) rather than pay up, and there were mutterings about how such pricing had been achieved. 

The wave of Samurai issuance is unlikely to dry up. According to Thomson Reuters data, Samurai bond sales are almost 30% above the average for the past 10 years. ¥1.17trn yen-denominated debt from foreign entities has been sold in Japan so far this year, versus an average of around ¥842bn.

Japan’s investor base might be conservative, as long as Japanese rates and corporate bond spreads remain at near-historic lows, the hunger for yield remains.

Tapping the depth of dollars

In mid-July seven Japanese issuers sold paper in the US dollar bond market. They raised more than US$11bn from an as impressive demand of US$40bn.

Takeda Pharmaceutical, the largest pharmaceutical company in Asia, sold US$3bn paper: a US$1.5bn 1.031% three-year tranche at plus 68bp and a US$1.5bn 1.625% five-year at plus 100bp.

NTT, the largest telecoms firm in Asia, in its first tap of the offshore markets since early 2007, sold a US$750m five-year Global at plus 80bp. It was followed soon afterwards by its own leasing arm, NTT Finance (the rare sight of a subsidiary following a parent into the offshore market) which sold its first offshore paper, a tight and heavily oversubscribed US$500m five-year senior unsecured issue at Treasuries plus 95bp.

There was a jumbo US$3bn three-parter from Japan’s second-largest bank Sumitomo Mitsui Banking Corp: a US$1bn 1.35% three-year at plus 100bp, a US$1.25bn 1.80% five-year at plus 120bp and a US$750m 3.2% 10-year at plus 170bp.

A US$1.5bn 10-year Lower Tier 2 sub bullet from Mizuho, Japan’s second-largest financial group, with a book of US$7.4bn which priced at Treasuries plus 275bp.

Mitsubishi Corp sold a US$750m 1.875% bond at 135bp over Treasuries, while policy bank Japan Bank for International Cooperation sold a US$2bn 1.1125% five-year SEC-registered Global benchmark at Treasuries plus 34bp.

Of course there are several corporate-specific reasons for the rush to dollars. NTT was “driven by arbitrage with the US dollar market”, said one syndicate head, for example, while Takeda’s was refinancing. The firm swapped the funds back into yen, using them to refinance ¥240bn (US$3.01bn) of a ¥570bn one-year bridge loan it took out in September 2011.

There is also the familiar cry of diversification. But the enthusiasm investors have for the paper is not just rarity value – the last 144a deal was Sony’s US$500m bond in 2001 – rather it is because these Japanese corporates are untainted by the eurozone. “From investors we are seeing incredibly strong appetite for non-European credits,” said one syndicate head in Tokyo.

But above all, what has driven all of the trades in US dollars so far are funding diversification and basis swap. So deeply negative is the US dollar/yen basis swap that the NTT paper, after the swap, broke the Japanese government’s own yen curve. And it is likely to continue, at least until year-end.

“The dollar yen basis swap will keep at current levels – I expect the current status for the next three to six months and more Japanese issuers to come into the international market,” said Morifumi Yotsumoto, head of DCM at Barclays in Tokyo.

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