Foreign bond sellers love Japan

By Rafael Nam and Rika Otsuka - Analysis

TOKYO (Reuters) - From Australian lenders to the government of Thailand, foreign issuers have sold a record $13.5 billion worth of bonds in Japan so far this year and more borrowers are expected to line up during the rest of 2008.

Japanese institutions have come through the global credit crisis largely unscathed, leaving them with cash to buy bonds issued in the country by foreign entities -- known as Samurai bonds.

Bond issuers are starting to tap the retail market as well, where some 780 trillion yen ($7.3 billion) is squirreled away in cash and deposit accounts that yield very little.

"We are very confident that the volumes will carry on for a while, at least through this year," said Brian Mccappin, Japan head of fixed income, currencies and commodities for Nikko Citigroup in Tokyo.

A confluence of factors have drawn borrowers to Tokyo's bond market.

For one, interest rates are low. The Bank of Japan has held its benchmark interest rate at just 0.5 percent since February last year and analysts don't expect the rate to rise any time soon. That makes it cheaper for fund raisers.

From a lenders perspective, the central bank's rate is still the highest in more than a decade. So a Samurai bond that offers a premium over Japanese rates is attractive to yield-hungry investors.

That was certainly the case in the first half when $13.5 billion in Samurai bonds were issued -- the highest first-half volume on record, Thomson Reuters data showed.

The money raised in Samurai bonds is also providing a key source of funding for financial firms that have found it tough to raise money since the subprime crisis erupted last year.

Funding in other parts of the world, such as the United States and Europe, has dried up as banks fear exposure to the global credit crisis. That has made selling bonds much more expensive and difficult.

Financial issuers, such as Royal Bank of Scotland, which sold 141 billion yen in a four-part bond last month, have been the most-active this year.

The lender offered its five-year fixed-rate tranche at a coupon of 2.59 percent.

But they have been joined by others, such as Thailand, which sold 55 billion yen in Samurai bonds, and South Korean cable maker LS Cable, which raised 10 billion yen.

Market conditions suggest the pace of issuance will continue, Mccappin says.

"There's a large amount of redemptions that are coming up this year. Yields will likely stay low since I don't think Japan will hike rates this year. Global credit spreads are widening once again," he said.