Lenders join yen funding party
Asian borrowers are raising yen-denominated loans at tighter interest margins than before, with lenders including non-Japanese banks remaining supportive for relationship and cross-selling purposes.
Thailand’s True Corporation is the latest borrower to jump onto the yen funding bandwagon with a loan of around US$460m-equivalent, which is expected to pay tighter pricing than its debut sustainability-linked yen-denominated loan completed less than six months ago.
More frequent yen borrowers such as Indian state-run financiers REC and Power Finance Corporation have also benefited from pricing compression.
A Singapore-based senior loans banker from a Japanese bank said tightening pricing is the result of heightened competition among lenders.
“We have no choice but to accept it as there are not that many deals in the market,” he said.
Pricing on True's three-year loan is expected to come inside the 85bp over Tonar interest margin it paid on last September’s ¥141.3bn (then US$987m) SLL with the same maturity. That facility had closed to a strong response, with 15 lenders from Asia-Pacific joining in general syndication.
Last week, PFC launched a US$150m-equivalent yen-denominated five-year financing with a margin of 71bp over Tonar, well inside the 83bp margin on the yen tranche of a US$1.265bn-equivalent loan it clubbed in October. Credit Agricole is the mandated lead arranger and bookrunner.
Lead arrangers with tickets of ¥3bn (US$20m) and above receive top-level all-in pricing of 86bp based on an upfront fee of 75bp, while co-arrangers with commitments of ¥2bn–¥2.9bn earn an all-in of 83bp through a 60bp fee. Senior arrangers with ¥1bn–¥1.9bn are offered an all-in of 80bp via a 45bp fee, while co-managers taking less than ¥1bn earn an all-in of 77bp via a 30bp fee.
PFC will use the proceeds for on-lending and any purpose other than for thermal generation projects.
As yen-denominated loans increase in appeal, borrowers and arrangers are casting the net wider to attract participants. In mid-February, REC launched a US$300m-equivalent yen-denominated five-year loan offering margins of 84bp (onshore) and 73bp (offshore) over Tonar – significantly tighter than the 95bp margin on its previous yen-denominated syndicated loan completed in November.
The differential in margins for onshore and offshore lenders is to account for withholding tax costs that have risen for Indian borrowers since a rule change on July 1 2023. The withholding tax rate can rise as high as 20% if there is no lower rate under a tax treaty between India and the country in which the lender’s parent is incorporated. The bilateral treaty rates vary, but for most countries they average at 10%.
Borrowing in a low-interest foreign currency such as yen helps reduce withholding tax costs. Moreover, in foreign currency loans for Indian borrowers, banks lending through branches in India’s GIFT City is exempt from withholding tax. Japanese mega-banks Mizuho, MUFG and SMBC have established branches in GIFT City.
The higher 84bp margin on REC’s latest deal is for lenders that can participate from India, including foreign banks with branches in GIFT City. As REC will have to gross up and bear the withholding tax to compensate offshore lenders, it is offering a lower margin of 73bp.
Maximising liquidity
Using this approach, REC will be able to tap into every possible source of liquidity, which is crucial given how frequently it visits the offshore loan market.
The latest US$300m-equivalent yen-denominated borrowing is the infrastructure financier’s fifth foreign currency loan since late September. The ¥27.6bn five-year facility REC closed in November attracted half a dozen banks in general syndication, including Taiwanese and smaller Japanese lenders.
“Yen is the best currency for the onshore-offshore loan structure for Indian borrowers,” said another senior loans banker in Singapore. “Such a structure has been common for foreign-currency loans for Indonesian borrowers, but for Indian borrowers this would make sense to garner as much yen liquidity as possible while keeping their borrowing costs low.”
A Tokyo-based banker at a Japanese mega-bank explained that yen-denominated loans are primarily targeted at Japanese investors, but if the loan sizes are large, borrowers often welcome commitments from foreign banks that have branches in Japan. This not only helps the borrower mop up liquidity available in yen, but also allows the foreign banks in Japan to put their local balance sheets to wider use.
“These banks participate if returns meet their expectations, and even if they don’t, some lenders participate because of the existing relationship with the borrowers,” he said.
A Hong Kong-based banker from a European lender noted that banks joined those deals as the borrowers are typically top-tier credits from their respective countries and industries, and also present cross-selling opportunities.
Indian conglomerate Reliance Industries is in the market with a loan of US$3bn-equivalent split into a US$2.5bn tranche and a ¥67.65bn portion. Bank of America and Credit Agricole are the non-Japanese banks among four leads arranging the ¥67.65bn portion.
In mid-February, Czech energy company EPH raised an ¥80bn-equivalent five-year loan that drew half a dozen non-Japanese Asian lenders in syndication for the yen portion.
In December, Indian state-run Housing and Urban Development Corp closed syndication of a ¥64bn five-year term loan with Bank of China and Industrial Bank of Korea Tokyo branch being the non-Japanese lenders among the seven joining in syndication.
A month earlier, China’s Ping An International Financial Leasing closed a ¥23bn two-year loan, attracting Agricultural Bank of China, Banco Comercial Portugues Macau and Nanyang Commercial Bank in syndication.
All three are relationship banks of the borrower, but only AgBank operates a branch in Japan.