REFILE-Even in Japan, dollar debt looks cheap

Tue Feb 19, 2013 1:19am EST

(Corrects basis swap RIC)

* Yen carry trade pushes cross currency swaps higher

* Move lowers dollar bond costs for Japanese issuers

* Japanese firms expected to issue more overseas debt

By Atanas Dinov

Feb 19 (IFR) - The ultra-low coupons on Japanese corporate bonds have long been the envy of global borrowers, but there are signs that Japan's domestic debt market may no longer be the cheapest game in town.

A pair of Japanese companies underlined the growing appeal of overseas fundraisings on Tuesday as they announced US dollar bonds. Nippon Telegraph and Telephone Corp is marketing a seven-year offering, while Bank of Tokyo Mitsubishi UFJ is working on a multi-tranche benchmark. Mitsubishi UFJ Lease & Finance is also preparing to launch its first dollar benchmark.

Japanese issuers have been a rare in the dollar market, and the growing interest in overseas fundraisings shows that the weakening yen is forcing companies to rethink their approach to issuing bonds.

"Domestic funding is no longer cheaper compared to the US dollar market," said one Tokyo-based debt syndicate manager.

American Honda Finance hinted at this changing dynamic last week, when it launched a US$750m five-year bond at a lower cost than its Japanese equivalent - Honda Finance - would have paid to issue in its home market. American Honda Finance and Honda Finance are wholly-owned subsidiaries of Japanese carmaker Honda Motor.

The yen's 17%-plus drop against the dollar since December has moved the cross-currency basis swap, a derivative that allows a company to convert an interest rate in one currency into another. Coupled with the extraordinarily low cost of credit in the US dollar market, bankers believe the swing in the swap market will lure more Japanese companies overseas in search of cheaper funding.

"It's all a matter of the basis swap. Pre-Lehman (collapse), the five-year basis used to be close to zero, then at one point last year was almost at minus 100bp," said the syndicate official. Bank of America Merrill Lynch quoted the swap at minus 57.875bp/51.875bp on Monday, according to Thomson Reuters Eikon.

EVEN MORE ATTRACTIVE

Japanese multinationals borrow in several currencies, and tend to look at their cost in each market relative to yen, making the basis swap a key part of that calculation.

In Honda's case, the US dollar bond priced with a coupon of 1.60%, at a cash price of 99.943 for a yield of 1.601%. That translated into a spread of 75bp over US Treasuries, equivalent to around 60bp over swaps, based on the five-year US dollar swap spread quoted at 15bp on Tuesday, according to Tradeweb prices. The swap spread is the differential between a fixed-rate and floating-rate liability in US dollars.

That level, for Honda, looks even more attractive once the coupon is swapped to yen.

Assuming a US dollar/yen cross-currency basis swap of about minus 55bp, bankers estimated that American Honda's deal would have swapped to about 10bp over Japanese government bonds. Meanwhile, the syndicate manager estimates that a new yen-denominated five-year bond by the Japan's Honda Finance would be priced somewhere between 13bp and 15bp over JGBs.

CARRY TRADE

The growth of dollar fundraisings is one consequence of the return of the yen carry trade, where Japan's monetary easing has forced domestic investors to look beyond the country's weakening currency.

"With the carry trade returning the gap in the basis is shrinking," said Yusuke Ikawa, rates strategist at RBS in Tokyo. "We are seeing the return of some non-Japan based investors involved in the dollar/yen FX carry trade. And the basis itself is a carry trade."

The yen/dollar basis swap has rebounded sharply since early December, and two weeks ago touched its least negative since mid-2011, reflecting the growing two-way interest in the currency swap.

Now, not only has the carry trade resumed, but foreign investors have also rediscovered their interest in Japanese assets, as evidenced by the 21% gain in the Nikkei index since early December. The move to swap dollars into yen for investment has also helped lift the basis.

With investors keener for Japanese assets and the cost of funding in dollars lower, more global debt is likely to come from Tokyo.

"Sentiment has significantly improved for this kind of financing. EU tail risk being lower is partly behind this. People now have more confidence to try to take advantage of the arbitrage opportunity," added RBS's Ikawa. (Reporting By Atanas Dinov; Editing by Steve Garton)