Yen Bond House: Morgan Stanley

IFR Review of the Year 2017
4 min read
Takahiro Okamoto

The effort made by Morgan Stanley and its joint venture Mitsubishi UFJ Morgan Stanley Securities (MUMSS) to expand the investor base for Global yen bonds paid dividends in 2017, delivering new opportunities for yield-starved Japanese investors and international issuers.

Conditions remained tough in the yen market throughout the year, with wide cross-currency basis swaps making it impossible for the highest-rated overseas issuers to take advantage of Japan’s ultra-low interest rates. The Samurai market also struggled to compete with tight credit spreads in US dollars and euros, and accounting rules led US issuers to shun the format altogether.

With the Samurai market in danger of shrinking, Morgan Stanley and MUMSS set out to cultivate the Global yen market, where some blue-chip names had drawn huge demand in recent years.

Previous success stories from sought-after names such as Apple had depended largely on the issuers’ reputations and support from commercial banks, and there was no guarantee that benchmark-sized deals would consistently be possible in the Global yen format.

Morgan Stanley and MUMSS’ answer was to expand participation from Japanese asset managers, who invest on behalf of pension funds. The duo’s salespeople and syndicate bankers spoke to asset managers and visited regional investors to break down the barriers that were preventing them from buying Global paper.

Traditionally, asset managers have preferred Samurai bonds, issued under Japanese governing law and with Japanese-language documentation, and have been reluctant to embrace Global yen bonds that are not eligible for the Nomura BPI, Japan’s major bond index. They were also unfamiliar with the faster execution process, and needed to overcome reservations around the use of the pot system for syndication.

But with yield in short supply in the domestic and Samurai markets some asset managers and regional banks changed their investment policies and were looking to buy Global yen bonds in 2017 for the first time.

Morgan Stanley and its partners successfully met this new appetite, bringing several benchmark-sized deals from the US corporate sector, including two debut issuers. They approached clients with operations in Japan and with a natural need for yen funds, who would not be affected by swings in the dollar/yen basis swap.

Aflac’s ¥60bn (US$535m) of 10-year bonds in January, handled by Morgan Stanley, proved popular with domestic investors, before Morgan Stanley helped bring Starbucks’ sensational debut with ¥85bn of seven-year sustainability bonds, which attracted overwhelming attention from investors.

Aflac’s return in October, with ¥60bn of 30-year non-call 10 subordinated bonds, showed that efforts to stimulate the investor base were bearing fruit: the deal was several times oversubscribed with 32% of it placed with asset managers.

MUMSS continued to perform strongly in the Samurai market, too. Electricite de France’s four-part Samurai in January was one of the highlights of the year in a market dominated by financial institutions. The ¥137bn trade was welcome supply, not just from the corporate sector but also in 10-year plus maturities, with a Green bond flavour added to two of the four tranches in response to requests from life insurers, the main ESG investors in Japan.

The joint venture was also involved in the emergence of senior non-preferred bonds under new legislation passed in France in late 2016 and also involved in senior non-preferred Samurai transactions by BNP Paribas, Societe Generale and Credit Agricole, helping French banks tap into a receptive investor base.

In the domestic market, MUMSS worked on hybrid financings such as Sompo Japan’s ¥100bn 60-year non-call 10 and Sekisui House’s ¥120bn 60-year non-call five, as well as large multi-tranche offerings, including Bridgestone’s ¥150bn trade and Rakuten’s ¥100bn deal.

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Yen Bond House: Morgan Stanley