Yen Bond: Rabobank’s ¥50.8bn 10-year bond
Far and wide
In Japan’s notoriously conservative domestic market, selling the first Basel III-compliant Tier 2 bond from a foreign lender was always going to be a delicate process. Dutch-headquartered Rabobank, however, was rewarded for its patience and meticulous planning with a benchmark-sized Samurai issue that paved the way for others to follow.
Bankers saw Rabobank as the ideal candidate to introduce the new asset class, having built a first-class reputation over a long track record in the yen market. Even then, success was far from guaranteed: Japanese investors were only just getting comfortable with Basel III structures from their local mega-banks, let alone with an issue under Europe’s far tougher banking regulations.
Kazuhide Tanaka, Rabobank’s head of long-term funding for Japan and its chief Japan representative, recalls broaching the idea with local investors almost two years before the issue was finally priced.
“The yen market’s low rates and low spreads make it tough for investors to find alternative investments,” he said. “We were confident that investors were looking for higher yields, but it took a while for the market to get their heads around it.”
There were numerous challenges. Many of the biggest Samurai investors are Japanese banks, which face punitive 250% risk weightings on holdings of subordinated bank debt under the Basel framework. Some big insurance companies and pension funds were also struggling to adapt their investment mandates to fit loss-absorbing capital securities, which can be written down to zero if the issuer is deemed to be short of capital.
At the same time, any issue had to fit with Rabobank’s own capital strategy and offer competitive pricing against its euro funding costs. For the deal to count towards Rabobank’s capital ratios, the loss-absorbing language had to conform to Dutch regulations, adding a further complication for domestic Japanese funds.
That meant targeting non-traditional groups of investors, and required a thorough marketing process to explain the intricacies of the structure.
Joint bookrunners Bank of America Merrill Lynch, Daiwa, Mizuho, Nomura and SMBC Nikko kicked off a three-day investor roadshow on November 25 2014, followed by a week of soft-sounding before books officially opened on December 8. From a range of 80bp–85bp over swaps, Rabobank priced the deal on December 12 at 83bp over, 2bp–3bp inside its euro Tier 2 curve while offering Japanese investors a fair premium to compensate for the risks in a subordinated European issue.
Life insurers, regional and trust banks did take part, but a big portion of the issue went to investors that rarely participate in Samurai bonds, including school associations, charitable foundations and corporate investors.
Rabobank’s debut set a template that was quickly followed. France’s BPCE, Societe Generale and Credit Agricole all followed with Samurai Tier 2 offerings in 2015, and the arrival of total capital regulations in November only underlined Japan’s relevance as part of the broad funding base for the world’s biggest banks.