Kuroda makes foreign paper too pricey for Japanese

Fri Feb 7, 2014 6:27am EST

* Levels almost flat to swaps make Samurai bonds expensive

* Cross currency basis moves prompt tighter yen spreads

* Investors seek better returns in lower-rated issues

By Frances Yoon

HONG KONG, Feb 7 (IFR) - The Samurai market showed signs of fatigue this week after GECC and JP Morgan sold their tightest-ever yen bonds, sparking questions about whether positive economic fundamentals are making deals too expensive for investors.

On Thursday, General Electric Capital Corp (A1/AA+) sold JPY55bn (US$542m) in three-year notes to yield just four basis points over yen offer-side swaps - the tightest spread to swaps it has locked-in for a Samurai deal. The 0.313% coupon was also a record low for GECC in the currency.

On the same day, JP Morgan (A3/A/A+) sold a three-tranche JPY48.5bn deal. The JPY36.3bn three-year fixed portion carries a coupon of 0.373%, the bank's lowest ever in the Samurai market, and priced at par to yield 10bp over swaps. A JPY12.2bn three-year floater also priced at par, equivalent to three-month Libor plus 16bp.

Despite the good results, both issuers sold much smaller amounts than they managed to place last year. In GECC's case, a banker on the issue said the thinner spread prompted some investors to drop out, saying it was too tight compared to a trade it sold in 2013. That JPY72.1bn three-year, part of a JPY95bn four-tranche outing, priced in September at 10bp over swaps.

"If demand was about the amount they actually printed and if they only got that size, other issuers may struggle," according to a debt syndicate banker not involved in either deal.

The two sales come after Commonwealth Bank of Australia heated up the race for spread compression with a thinly-priced issue in November, followed by National Australia Bank last month. February was a good month for borrowers to sell deals, bankers said, because it accounts for 21% - some JPY406bn - of all Samurai redemptions for this fiscal year ending March 31, 2014.

Samurai investors have always embraced highly rated foreign financial institutions such as GECC and JP Morgan not only for their perceived safety, but also because their deals offer healthy premiums over similarly rated bonds in the local market. These borrowers often achieve levels from Samurai issuance that translate into funding costs equivalent to or sometimes even inside those available in their native US dollar market.

A crucial element in comparing funding costs is the level of the cross currency basis swap. Despite a hefty drop early last summer, that swap has improved since Bank of Japan governor Haruhiko Kuroda announced unprecedented easing measures in April, with the yen over the period weakening dramatically.

The three-year dollar/yen swap moved from -48 to a peak of -36 in mid-January, while the yen traded from 93 versus the dollar to above 104, according to Thomson Reuters data.

For issuers looking at Samurais, however, a recent worsening of the swap has brought the need for tighter yen Libor spreads, so that swapped funding costs remain competitive with levels available in the dollar market.

Over the past three weeks, investors seeking safe-haven assets amid the market turmoil helped to strengthen the yen, moving the swap about five basis points more negative since mid-January.

Taking that into account, GECC, for instance, paid an estimated 11-12bp more than its US dollar funding levels despite the scanty Libor margin on its recent Samurai issuance.

People close to JP Morgan's deal, however, suggested that the bank managed to raise funding at the same cost it would pay in dollars, even though some pundits suggested the bank may have paid up as much as 10bp more for choosing the yen route.

"Some frequent issuers like JP Morgan and GECC will take the longer term view, and if they have to pay a bit more this year than they did in 2013 they will live with it - in the end they will have saved so much in other deals that it all evens out," said a senior DCM banker.

However, he cautioned: "As the credit spreads get closer to flat to yen swaps, it begs the question of how to address the issue [of low return for investors]."

The tight spreads also mean Japanese investors have become more interested in buying lower rated bonds of Triple B and lower Single A issuers to protect their average spreads, say bankers, although some argue that investors will still favour quality that is on a par with GECC and JP Morgan.

"In the future, Samurai issuers may have to be confronted with the need to compensate local investors better to attract their interest."