* 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
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
"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,
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
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