Japan's samurai bond issuance on track to set record this year

Mon Jul 14, 2014 4:56am EDT

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* Samurai issuance at 6-year high in first half of 2014

* Japanese investor demand strong despite tighter spreads

By Lisa Twaronite

TOKYO, July 14 (Reuters) - Japan's samurai bond market is on track for a record year, as low issuance costs and yield-starved Japanese investors tempt more foreign companies to issue yen-denominated debt.

The popularity of samurais might seem counterintuitive, as spreads are far tighter now than in the heyday of such bonds before the 2008 financial crisis dried up the market.

But as yields on other types of fixed-income bonds and instruments in Japan are even lower, there's growing investor demand for samurai bonds - at the same time that it has become more cost effective for foreign firms to issue them.

Samurai issuance in the January-June period came to 1.5299 trillion yen ($15.08 billion), according to Thomson Reuters data, the highest amount in six years and just shy of 2013's full-year total of 1.636 trillion yen.

More deals are in the works, so 2014 issuance is poised to overtake 2008's record of 2.307 trillion yen, bankers here say.

Corporate debt-issuance by Japanese firms fell to about 4.33 trillion yen in the first half of this year from 5.27 trillion in the first half of 2013, according to data from Thomson Reuters. At the same time, the Bank of Japan (BOJ) is soaking up liquidity in the government bond market under its massive monetary easing programme, narrowing the options for domestic bond investors.

"Even though the spreads have narrowed, there's still good demand for credit products from regional banks, pension funds, insurers - everybody who wants fixed returns and relatively low risks," said Tadashi Matsukawa, head of Japan fixed income at PineBridge Investments in Tokyo.

STILL ATTRACTING BUYERS

Hongkong and Shanghai Banking Corp, a wholly-owned subsidiary of HSBC Holdings, sold a 5-year fixed-rate 75 billion yen samurai bond last month at a record-low coupon with the tightest spread in at least 14 years.

Still, the yield at 1 basis point over yen offer-side swaps, or 0.345 percent, was still well above where 5-year Japanese government bond stood at 0.155 percent on Monday.

The BOJ's massive asset-purchase programme has kept a tight lid on Japanese government bond yields, and the low global interest rate environment has added even more pressure. Last week, Japan's benchmark 10-year bond yield fell to a 15-month low of 0.530 percent.

"Japanese investors have money, but there's not much corporate supply here, so they have to think about buying samurai bonds," said Kenichi Kanda, head of international debt origination at Daiwa Securities in Tokyo.

Last month, Barclays Bank issued 125 billion yen of samurai bonds. In May, French automaker Renault sold 150 billion yen of the instruments, and Morgan Stanley also sold 150 billion yen's worth, the U.S. bank's first such sale since the before the 2008 crisis. Also in May, Netherlands-based Rabobank and Sweden's Nordea each issued yen bonds worth 100 billion yen.

"More issuers are looking at alternative markets such as samurai as funding through the samurai market is more economically justifiable than before," said Takaomi Tahara, joint head of international debt syndicate at Nomura Securities in Tokyo.

Non-Japanese issuers seeking to diversify their funding have not always been able to benefit from Japan's rock-bottom interest rates. Most of the issuers have no yen needs and therefore have to swap the funds they raise into other currencies, which can offset any benefits from interest rate differentials.

But recent low swap rates, which gauge the cost of exchanging interest payments from the dollar to yen, have kept issuance costs competitive.

The 5-year yen-dollar basis swap rate narrowed to around minus 41 basis points from minus 75 a year ago.

"In one year, we've seen improvement in the yen-dollar basis swap, and that means that from issuers' perspective, yen funding becomes less expensive," said Tahara. ($1 = 101.4700 Japanese Yen) (Editing by Richard Borsuk)

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