Yen Bond House
ROLE MODEL - After seven years of threatening, the combined Daiwa SMBC franchise established in 1999 has finally come through as a paragon of synergy across all sectors in the yen markets. Daiwa shone in both the domestic and international spaces and is IFR’s Yen Bond House of 2006.
Among the wholesale Japanese investment banks, Daiwa SMBC is the only one to combine a major investment bank – Daiwa Securities – with a mega-bank – SMBC – and the odds were always low that this business model would eventually provide Daiwa SMBC with a competitive advantage over its peers.
Soon after the institutions amalgamated, there were the familiar teething problems, with the investment bank and commercial bank encountering the inevitable clash of cultures.
But in 2006, Daiwa’s business model finally established itself in what has become an arena of savage competition for deals across the domestic and international markets. That the Book-Entry Transfer System (BETS) settlement debacle effectively shut down the Samurai market, only intensified this competition, and operators needed to be nimble and capable of capturing a broad franchise if they were to stand out.
Daiwa SMBC was able to leverage off the distribution of its 120 securities branches in Japan and its global investment banking operations, plus the origination edge it has from SMBC’s corporate coverage, to assume a dominant position across the various sectors of the market. Its dominance in the JGB market also provided it with access to key offshore institutional accounts, particularly central banks, enabling it to sell new paper in the Euroyen market.
Daiwa also increased its JGB research headcount in Tokyo and, in turn, this commitment to the government market created a tailwind for its domestic business, where again it ranked number one in the league tables for corporate and Zaito issuance. Indeed, purely from a league table perspective, Daiwa’s year was stellar, with the bank scoring number one position in JGB auction participation, according to the Nikkei Weekly, number one in the Thomson Financial league table for Samurai issuance and number two in both Euroyen/Global and all international yen issuance.
“Our footprint is broad and we are active in every area of the yen bond market,” said Stephen Apted, joint head of debt syndicate at Daiwa SMBC in London. “Since the merger with SMBC in 1999, our trading floors have doubled headcount and this was the year when the synergies we had been seeking for so long actually kicked in to a meaningful extent.”
But it is not just about league tables, and Daiwa’s signal achievement in 2006 was facing up to the harsh reality of a Samurai market shut down to US borrowers, its traditional source of bulk issuance, thanks to ambiguities about the tax treatment of bonds issued under the new Japanese book entry system. Daiwa sourced mandates further afield, a challenge, given Japanese investors’ deep conservatism regarding booking unfamiliar, offshore names.
In October, Daiwa led a ¥50bn three-year Samurai for Iceland’s Kaupthing Bank, representing the its debut in that market and the first time an Icelandic borrower had tapped Samurai investors. It was also the first Nordic FIG Samurai since 2000 and the first to be booked under the new BETS settlement system. The deal added to Kaupthing’s successful track record as a debut borrower in 2006, with the bank having brought well-received trades last year in the Kangaroo, US 144a and US dollar extendible spaces and efficiently met the borrower's aim of further diversifying its investor base.
It was initially filed as a ¥20bn trade in pre-marketing and demand was sufficient to allow an upsize, with a final order book in the region of ¥75bn. A wide range of accounts participated including asset managers, life and non-life insurers, central public institutions and Shinkin banks. The print barely six months after the flight of hot money in March had sent the Icelandic krona reeling 18% and raised the prospect of the country’s major banks being unable to roll over short-term debt was impressive and opens the way for the bank to print ever-tighter, a phenomenon frequently seen in the Samurai market with new borrowers.
Daiwa also ticked another box in the maiden borrower space with its ¥50bn three-year FRN for Alliance and Leicester on which it was sole bookrunner. The paper filled an obvious pocket of demand for the floating product following the end in March of the Bank of Japan’s quantitative easing policy, when a 25bp rate rise spooked the fixed-rate market and raised the prospect of a prolonged bear market in fixed bonds. Still, the FRN product is not a slam-dunk in Japan, since the product is not included in the NRI index against which many funds are benchmarked. The trade came in at three-month yen Libor plus just 6bp and was the largest floating yen FIG issue since 2003.
Stalwarts underpin momentum
With its stalwart frequent borrowers in Central Europe and South Korea, Daiwa kept the momentum going with some headline deals. Perhaps the most impressive was the Republic of Poland ¥85bn 10 and 20-year Samurai in November, which, at ¥60bn, printed the biggest 20-year tranche seen in the Samurai market and the largest deal out of Central Europe. This was the sixth Samurai deal from the Republic and amply demonstrated the cost advantages to borrowers of having access to the Japanese investor base, with the sovereign printing flat to its euro curve.
Indeed, Daiwa had raised the bar from its previous record-breaking Poland Samurai trade in November 2005, which saw it print the largest-ever 15-year Samurai and brought its total issuance in that market in 2005 to a hefty ¥125bn, the biggest total sovereign issuance seen in a decade. Daiwa added a tweak to the deal in the form of an extra three months on the tenor to fit the Republic’s debt maturity profile, allowing the paper to fall in 2021 rather than 2020.
Pretty much everything Poland has done in the Samurai market has been spot on, with its possession of a shelf programme enabling it to increase its last Samurai by 70% rather than the 30% ceiling on non-shelf deals from the initial filing amount.
Daiwa’s Central European footprint broadened further in 2006, with it leading a ¥50bn seven-year for the Republic of Hungary, its fourth Samurai issue. The deal was doubled from the original ¥25bn plan and at the final print level was still oversubscribed. At Libor plus 10bp, this was the tightest spread out of the region, printing flat to the euro curve and despite prior negative pre-election noise from the ratings agencies. Once again, Japanese investors demonstrated loyalty to a familiar name, with the deal stamping Hungary’s 20-year presence on the Samurai market.
Meanwhile, Daiwa joint-led a ¥26bn five-year Samurai for India’s Exim Bank in November, the largest deal in that space from an Indian borrower. It priced at Libor plus 70bp, or 3bp through the secondary level of Exim’s due 2011s, achieved a higher level of placement into Japan than the bank’s debut deal and was well supported by non-Japan Asian investors.
And, although, at ¥20bn, the deal Daiwa co-led in May for Nippon Paper was not of hefty size, its timing was bold, coming just a few months after the Bank of Japan tightened rates. The leads decided to remove a planned 10-year tranche and this proved to be a canny decision since the five-year piece attracted an oversubscribed book and broad participation from life and non-life insurers as well as trust banks, regional banks and Shinkin banks.
Also boosting Daiwa’s strategic focus in origination was a streamlining of its Tokyo operations, with the international finance division that was previously responsible for Samurai issuance joining the capital markets division. According to bank officials, this has created synergy between the bank’s domestic primary and Samurai businesses.
Ko Kawana, who runs Daiwa’s Samurai origination team in Tokyo said: ”The combination of these teams gives us better access to domestic borrowers and, although the merger happened only at the beginning of October, it is already beginning to show great promise for our business going forward.”
The fierce competition in the yen bond market shows no signs of abating, and, inevitably, fundamental questions are being asked about the direction of smaller houses and how long others can continue to function effectively without a bank tie-up. It seems almost inevitable that they will seek to copy the Daiwa model.
Daiwa’s London operation, which has been instrumental in originating and distributing many of the bank's products, is characterised by its balanced mix of young bankers and experienced veterans.
“I've been here for over 20 years and believe that the current blend of youth and experience right across the various departments of our yen bond operation is producing our best-ever customer service package,'' said Vince Purton, of Daiwa’s emerging markets debt origination team in London.
This could well be the role model others will choose to emulate.
- Jonathan Rogers