Mitsubishi UFJ Financial Group used the JGB yield curve as a benchmark in its latest dual-tranche subordinated bond offering, as it prepares for the planned end to the London interbank benchmark rate at the end of 2021.
The end of Libor will not have a big impact on the Japanese credit market, where there are not many floating rate bond deals and most domestic fixed-rate bonds price over a specific Japanese government bond. However, Japanese issuers may need an alternative benchmark as hybrid bonds, which usually have a floating-rate coupon after a first call date, have become increasingly popular on the back of robust demand from investors.
Usually in the domestic market, a Japanese bank uses a specific JGB as a pricing benchmark for a fixed-rate subordinated bond and mid swaps for a callable sub bond. The coupon on a callable bond is generally a fixed rate based on mid swaps until a first call date and switches to a floating rate based on Libor if not called.
In MUFG's latest two-part transaction, both the ¥34bn (US$316m) 0.885% 10-year subordinated bond tranche and the ¥28bn 0.55% 10-year non-call five sub tranche were priced relative to the JGB compound yield curve. The spreads were 88bp and 69bp, respectively.
For the callable tranche, lead manager Mitsubishi UFJ Morgan Stanley thought the JGB yield curve should be used as a pricing benchmark to calculate an accurate spread in the five-year point, given that a spread until a first call date affects the spread that is used to determine a floating rate after the call date.
To be consistent, MUMSS used the JGB yield curve for the other tranche as well.
The coupon on the callable tranche will switch to a floating rate of 48bp over the Japanese yen Tibor, one of the fallback options the Japanese benchmark rate committee has discussed if the yen Libor is discontinued.
Both tranches priced at or near the tight ends of the initial price guidance ranges of 88bp–93bp and 68bp–73bp, respectively.
Regional investors, drawn by the high coupons on both tranches, placed market orders, accounting for about 90% of the total size. Tokyo-based investors were cautious about market fluctuations caused by the coronavirus pandemic.
The subordinated bonds are rated A+ by both R&I and JCR.