Japanese borrowers have been visiting the US dollar and euro bond markets in force this year, pushing volumes to new highs as the international market offers options for large, attractively priced deals.
The supply of US dollar paper from Japanese issuers reached nearly US$92bn up to July 14, more than in the same periods of the previous three years, according to LSEG data. That puts the market on track to at least meet the 2024 total of US$106.5bn.
Likewise, the volume of euro-denominated deals passed €20bn compared with just over €23bn for all of 2024.
A spate of mega deals have run up the numbers in the past few weeks. Telecoms company NTT raised US$17.7bn-equivalent across four euro tranches and seven US dollar tranches in July. The same week, Nissan Motor collected US$4.5bn-equivalent from euro and US dollar bonds. Earlier, SoftBank Group sold a US$4.21bn-equivalent US dollar and euro trade. On Wednesday, memory chip maker Kioxia raised US$2.2bn in its first US junk bond sale.
“It’s kind of a coincidence we had the three jumbo transactions this summer,” said Takehiro Sakuramoto, head of capital markets for Goldman Sachs in Japan, referring to NTT, Nissan and SoftBank. “Everyone has been surprised by the huge issuance from Japan.”
For Japanese corporates with large fundraising needs, the domestic market is too limited, at just a fraction of the size of the US dollar bond market. The international market offers the opportunity for larger sizes and longer tenors at attractive prices.
“The pricing is competitive,” said Rentaro Hayashi, director of DCM at Citigroup in Japan. “[Funding in] yen tends to be slightly tighter than dollar or euro. [But] investor demand in Japan is softer than previous years."
Rising rates
While other countries have been cutting rates, Japan has been on a rate rising cycle following years of zero or negative rates. The disconnect makes the international bond market more appealing to Japanese borrowers as local investors hesitate to buy bonds, particularly long tenors, while they expect at least a couple more domestic rate hikes to come. The current policy rate is 0.5%.
“Historically, the Japanese domestic market used to offer the best funding for Japanese issuers in terms of funding levels with decent issue amounts, offering flexible tenor options. But a couple of years ago the Japanese yen market started to change, since the rate hike cycle started – unlike the rest of the world,” said Takafumi Konno, head of international DCM/debt syndicate in Japan at Nomura.
“The trend we are seeing is that even if Japanese investors want to participate in the yen market, their preference for tenors has been on the short end of the curve.”
Deal sizes also seem to have shrunk, with Konno noting that public deals smaller than ¥10bn (US$67.3m) that would have been rare have become more common in the past couple of years.
"Despite the higher interest rates, financing demand from the corporate borrowers remains fairly solid. They have an appetite for growth," said Kiyoko Ohora, chief analytical officer at S&P in Japan. "There is also an increased need for working capital because of the higher inflation."
"Many Japanese large companies are trying to diversify their funding sources ... They would like to ... finance in the overseas market to connect with investors."
High-yield opportunities
For high-yield borrowers, Japan’s domestic market is even more limited, with borrowers having to rely on retail investors if they want to print in yen.
“The high-yield bond market has not yet been established in Japan,” said Goldman's Sakuramoto. “There is almost no capacity for high-yield bonds in the onshore Japanese market … the only way is to go to the international market.”
A handful of high-yield borrowers have come offshore with great success, including the Nissan deal.
Following Nissan, Kioxia, rated BB+/BB+, issued five-year non-call two and eight-year non-call three bonds in its debut US dollar sale. S&P's Ohora said the Kioxia deal was particularly interesting because it is related to a leveraged buyout. Proceeds will be used to repurchase preferred shares issued to Development Bank of Japan and for general corporate purposes, as part of a broader company refinancing that includes the release of collateral backing term loans. A consortium led by private equity firm Bain Capital bought Kioxia in 2018 for about US$18bn-equivalent.
The LBO market in Japan is an active one, and Kioxia's ability to sell US dollar bonds could present a template for other companies.
Japanese borrowers in general benefit from their rarity in the US dollar and euro markets and Asia has been facing a dearth of high-yield issues, leaving investors hungry for paper and new Japanese deals offering opportunities.
“Due to the scarcity value of Japanese names, there is very healthy demand from all over the world but especially from Asian investors,” said Konno.
Sakuramoto is adamant that the yen market is not closed to issuers. “We have marketed several yen onshore bond transactions since January,” he said.
Bankers agree that US dollar and euro volume will continue in the second half of the year as the usual Japanese financial names come to the offshore market. More corporates may join the mix as well.