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Friday, 15 December 2017

The insatiable Mrs Watanabe

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  • 100 euro notes are spread out next to 10,000 yen notes at Interbank Inc. money exchange in Tokyo

The retail-targeted Japanese primary bond market has undergone thorough changes resulting in a wider variety of issuers offering higher credit risk. Global and local market conditions have transformed the appetite of the Japanese retail investors, which in turn, pulled in different sets of SSA issuers.

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Referred to as Mrs Watanabe, the famed Japanese households command vast financial assets, estimated at ¥1,483trn (US$18.37trn) as of December 2011, according to the Bank of Japan. In its quest for yield in deflationary Japan, retail investors have been exporting Japanese capital to foreign issuers for years.

The Uridashi issuance, done under foreign law and brought back to Japan, provides one of the channels for mass-market distribution. Traditionally, Japanese houses have avoided offering credit risk to the retail and have sold bonds from high-grade Triple A or Double A rated SSA credits as the underlying issuer. Such Uridashi bonds often feature equity-linked, structured or foreign exchange risk as a mean for retail to gain currency or other non-credit exposure.

“The Uridashi market provides easy access for retail investors. At the same time it is a helping hand for funds to have access to retail at a tough time of lower equity prices in Japan,” said one head of a MTN desk, also responsible for pricing Uridashi deals.

The persistent global low interest rate environment has slowly but surely has forced retail to reconsider their investment destinations. They have shown preference for lower rated issuers in high-yielding currencies substituting some of their earlier choice for structured equity and FX risks – amid strong yen. The result is increased Uridashi issuance from lower rated agencies and scarcer supra supply.

“There is no alternative to buy now. If it was the International Bank for Reconstruction and Development it would likely be that the cost will not work out for them or that the yield for a plain vanilla deal would be so low that it would be impossible to attract retail,” said one Tokyo-based head of structuring at a foreign house.

“We have witnessed two major trends from Uridashi investors. They have increasingly migrated to high-yield emerging market currencies and are reaching further down the credit curve for incremental yield pick-up”

Granted, the quasi-governmental agencies remain the main Uridashi sector but new, lower-rated issuers have joined the printing room. Sweden’s government-owned mortgage agency, SBAB Bank made its Uridashi debut this year.

Since Export-Import Bank of Korea found a cheaper funding ground with its first Uridashi via Daiwa in January 2011, it has been a regular player, tapping exotic currencies like the Brazilian Real and the Mexican peso. Soon the Korea Development Bank followed its peer with its maiden foray in February. All three entities are rated Single A.

However, the highlight of such increased credit risk offering from a lower-rated agency was the Export-Import Bank of India’s rare multicurrency offering at the beginning of April. While not a new name to the wholesale yen market, its low Triple B status (Baa3/BBB–/BBB–; Moody’s/S&P/Fitch) offered a different risk dynamic.

To spice up the three-year Indian vanilla offering in yen, Australian dollars and South African rand the deal carried a slightly higher rating of BBB+ by JCR. Mizuho was manager and selling agent of the deal.

Banks sneaking in

Both structured and vanilla issuance in high-yielding currencies remains strong from high-grade Nordic agencies but at the same time banks are increasing their market share. While FIGs are not yet usurping the traditional top spot held by SSA borrowers, their funding volume is gaining prominence.

On the back of strategic relationships, FIGs as low as Single A have been printing decent-sized deals. Barclays used SMBC Nikko to distribute a massive ¥125bn 1.05% 3.5-year deal while Morgan Stanley relied on Mitsubishi UFJ Financial Group to add ¥17.7bn and A$152m five-year notes to more than ¥100bn worth retail funding last year.

Some foreign houses such as JP Morgan have been active. Albeit with no retail presence in Japan, the US bank has been an active bookrunner of Uridashis since mid-2011 using a string of smaller local brokerages as sales agents to distribute paper across the country. It managed Kexim’s inaugural deal in a high yielding currency in July 2011 as well as KDB’s and Lloyds TSB’s debut Uridashi this year.  It has altogether handled 16 trades for Kexim and seven for Lloyds.

“As central banks have flooded the markets with cheap money and interest rates in major developed economies have compressed to record lows, we have witnessed two major trends from Uridashi investors. They have increasingly migrated to high-yield emerging market currencies and are reaching further down the credit curve for incremental yield pick-up. Genuinely, this market remains dominated by either sovereign-owned credits or well-rated private companies,” said Chris Abbott, debt syndicate official at JP Morgan in Tokyo.

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