Yen Bond: Japan Airlines’ ¥178.9bn dual-tranche perpetual bond
Navigating turbulence
Global markets were thrown into disarray by the US "liberation day" tariff announcement in early April, and the Japanese market was no exception. While other issuers decided to postpone their deals or cut the size, Japan Airlines flew through the storm with aplomb to sell a ¥178.9bn (then US$1.2bn) two-part perpetual bond.
The transaction was a landmark even without accounting for the timing, as the airline gave a boost to Japan’s limited hybrid bond market. Prior to this trade, perpetual bonds in yen were mostly issued by FIGs, with high-precision machine tool manufacturer DMG Mori the only corporate issuer.
When Japan Airlines printed its ¥150bn perpetual non-call five-year and ¥28.9bn non-call 10-year notes, yen rates were extremely volatile. The yield on the 10-year Japanese government bond had fallen from 1.58% on March 27 to 1.11% on April 7 before bouncing back to 1.24% the following day. Brewers Asahi Group Holdings and Suntory Holdings, as well as two other corporate issuers, decided to postpone their onshore bond offerings.
But JAL proceeded as planned on April 10. The notes inevitably priced at the wide end of initial guidance of JGBs plus 200bp–230bp and plus 240bp–280bp, respectively, but the demand was notable, reaching ¥220bn at the peak.
JAL was confident in its approach as it had completed diligent investor work, and it anticipated investors would have an abundance of cash at the beginning of the fiscal year.
"The yen market had no track record of selling a perpetual bond except for DMG Mori, so JAL was trying to develop a perpetual bond market in Japan," said a banker involved.
JAL's success paved the way for other corporates to sell perpetuals, with DMG Mori in June printing its second and Rakuten Group making its debut in October. A credit analyst in Tokyo called the JAL notes “transformational”.
Investors who supported the transaction were rewarded. The spreads on the perpetual non-call five and the non-call 10 each tightened about 65bp between pricing and early November.
The proceeds will be used for purchases of energy-efficient aircraft. The bonds, under IFRS, are classified as equity financial instruments, helping to protect its ratings at the time of BBB/BBB+ (R&I/JCR).
Bank of America, Daiwa, Mitsubishi UFJ Morgan Stanley Securities, Mizuho and Nomura were lead managers, with BofA as lead-left on the non-call 10 tranche.