Japan bond squeeze keeps Samurai market on a roll

Reuters

* 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 tensions.

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 in July.

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 open up.

"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 to go."

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 higher returns.

"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 possible threshold.

"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 Garton)

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