Foreign bond sellers love Japan

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.

While central banks around the world are set to raise interest rates to combat surging prices, economists expect Japan to keep its monetary policy unchanged as the central bank frets about maintaining growth.

DISCERNING INVESTORS

While Samurai bonds offer Japanese investors higher returns that they might find in the domestic market, they remain discerning.

Only firms with top credit ratings, a solid reputation and a proven track record in delivering bond returns will get deals done, analysts said.

U.S. banks, for example, could find it harder to sell bonds, because billions of dollars of writedowns in the financial sector there have raised concerns about the health of the companies.

And Japanese investors are not totally immune to fears over the global credit turmoil.

Suncorp-Metway Ltd, Australia's sixth-largest lender, and U.S. life insurer Prudential Financial Inc both postponed Samurai bond deals in June, as these scares resurfaced in world markets.

"Japanese financial institutions have not been as hurt by the subprime crisis, so they have more room to take credit, although it depends on what kind of credit," said Yuuki Sakurai, general manager for financial and investment planning at Fukoku Mutual Life Insurance.

Prestigious global names will get deals done, Sakurai said in remarks to this week's Reuters Investment Summit in Tokyo.

"I think there will be quite a number of Japanese institutions who are interested buyers in Samurai bonds."

SAMURAI HOUSEWIVES?

Individual investors are getting into the act as well. In recent years they have turned to overseas markets for higher returns as Japanese interest rates stagnated but rates elsewhere rose. New Zealand rates, for example, currently stand at 8.25 percent.

This often means marketing to Japanese housewives, who traditionally manage household budgets in the world's second-biggest economy.

In the first retail Samurai bond deals since 2003, Citigroup and Commonwealth Bank of Australia sold a combined 266.5 billion yen to Japanese earlier this year.

Mccappin said he expects volumes of retail Samurai bonds to grow this year, though they will remain a fraction of the total volumes that are typically sold to institutional investors.

"The world's best borrowers are looking into this," said the Nikko Citi managing director.

"It places a different type of responsibility on the underwriter. We don't want to sell our clients something that's not suitable. Deals marketed to retail customers will only be from the best or very robust credits."

($1=106.32 Yen)

(Editing by Neil Fullick)