* Foreign borrowers eye yen bonds for cheap funding
* Monetary easing forces Japanese investors into new markets
* Samurai bonds largely immune to global tensions
By Frances Yoon
HONG KONG, Aug 15 (IFR) - Governments and financial
institutions are lining up to sell bonds to Japanese investors
as they look to take advantage of record-low yen funding costs
in a market that remains isolated from global geopolitical
BNP Paribas and Svenska Handelsbanken
are looking to issue Samurai bonds as early as next month, while
Turkey is also mulling a deal that would be guaranteed by the
Japan Bank for International Cooperation (JBIC), according to
bankers familiar with the plans.
The governments of Kenya, Hungary, Indonesia and Poland are
also examining the possibility of issuing sovereign Samurai
bonds in the second half of the fiscal year, while a diverse
range of Asian issuers are also forecast to come to the yen
market, including Development Bank of Mongolia and Export-Import
Bank of Korea.
Mexican state-run oil company Pemex is also
considering a Samurai issue, treasurer Rodolfo Campos told IFR
The growing pipeline comes as the Bank of Japan's monetary
easing programme has driven yields on domestic bonds to
ultra-low levels, pushing more Japanese investors to consider
overseas credits in search of higher returns.
The benchmark 10-year Japanese government bond yield
touched a 16-month low on Friday at 0.495%, while
the five-year domestic benchmark for Single A rated issuers
hit 0.348% earlier this month, its lowest yield since
at least 2010.
The Samurai market, with Japanese language documentation and
local conventions, has become a popular alternative for the
country's fund managers. Traditionally reserved for only the
highest-rated foreign issuers and short tenors, the range of
deals in the pipeline shows the conservative market has begun to
"Investors are more aggressive than they've ever been as we
are finally going down the credit curve," said the banker. "This
will be a true testament on how aggressive the market is willing
BUSIEST SINCE 2008
Samurai issuance in the first four months of Japan's fiscal
year reached ¥1.1trn (US$10.75bn), up 37% on the same period
last year and at the highest since 2008, according to Thomson
Reuters data. Japan's fiscal year starts on April 1.
Most bankers are expecting dealflow to remain strong as
issuers continue to look for alternatives to US dollar debt and
Japanese investors look down the credit curve in search of
"We may see more than US$2bn in yen issuance by the end of
September," said a senior syndicate banker in Tokyo.
"Geopolitical risks have been rattling global markets, but
we don't see much of that affecting the Samurai market since we
don't see issuers from Ukraine, Israel or Iraq."
Borrowers that have tapped the Samurai market so far this
year have done so at historically tight spreads, while European
borrowers in particular have been able to save on their funding
costs in their home markets.
French bank BPCE in July priced its three-year
bonds about 13bp inside its euro secondary curve, after swapping
the proceeds back to euros. Its five-year yen bonds also came
2bp tighter, even after the European Central Bank's June rate
cut prompted euro spreads to tighten.
French carmaker Renault also was able to tighten
spreads considerably on a ¥150bn deal in May, before walking
away with the largest corporate Samurai outside the financial
sector since 2005.
French quasi-sovereign bank Caisse des Depots et
Consignations set a record for the lowest credit
spread for a senior unsecured Samurai bond since the 2008
financial crisis, pricing five-year and 5.5-year tranches in
July, both at 1bp below yen offer-side swaps.
HSBC a month earlier paid the lowest spread for a
commercial bank since at least 2000 when it sold a ¥75bn Samurai
bond at 1bp over swaps.
THINNEST SPREADS POSSIBLE
Typically, borrowers sell Samurai bonds in tenors of two and
three years, but this year's crop of new issues has included
offerings beyond five years. Mexico, the only sovereign to issue
so far this fiscal year, sold its first 20-year tranche and is
hoping to replicate its success even if it means issuing at a
different time of year.
"We have tended to focus on these June, July windows for the
yen, but if there are good conditions in the beginning of 2015,
we could evaluate that," said Alejandro Diaz de Leon, Mexico's
head of public credit.
Demand from domestic Japanese investors has been so strong
that Malayan Banking was able to price a Pro-bond in
the beginning of August, despite the summer lull. Pro-bonds,
like Samurais, also are sold by foreign borrowers, but Pro-bond
documentation can be submitted in English instead of Japanese,
as they are only available to professional Japanese investors
and require fewer disclosure statements.
Not all bankers are optimistic that the bubbly atmosphere
can be maintained throughout the year, however.
For one, a move in cross-currency interest rate swaps could
make yen funding more expensive for overseas issuers - even at
such low coupons. The five-year dollar/yen cross-currency basis
swap reached -44bp on Wednesday, weakening from -39bp a week
ago. A more negative number adds to the premium an issuer must
pay to convert yen proceeds into US dollars, making it less
attractive for overseas issuers to borrow in yen.
Another concern is that spreads have reached the thinnest
"The last time spreads were this tight was in the summer of
2007," a Tokyo-based debt origination banker said. "Spreads
widened consequently. The problem is we are now at Libor flat,
and the only direction to go from here is up."
"The question is not if, but when."
(Reporting by Frances Yoon. Editing by Abby Schultz and Steve