The Samurai market is back. But so far, it is proving to be a double-edged sword for Asian issuers, as the bond market breaks all records and the loan market experiences investor fatigue.
A bifurcated market has led to $6.49 billion equivalent of Samurai bond issuance to the end of August according to Dealogic figures. This is higher than the previous record-breaking $4.99 billion during the whole of 1996 in the market’s glory days before the Asian Financial Crisis (see table 1).
Only $1.15 billion has been issued, however, in Samurai loans so far this year compared to $3.91 billion for the whole of 2018.
The bond/loan volume differential can be attributed to the contrasting types of Asian credits accessing each market.
The loan market tends to be dominated by lower investment-grade rated corporates, particularly from India over the past year. The bond market, on the other hand, has historically been the preserve of investment-grade rated Asian sovereigns and a handful of higher-rated regional corporates because investors were loath to embrace lower-rated investment grade and high-yield credit ratings from names they were not familiar with.
India Exim Bank’s recent Samurai, plus forthcoming debuts from Indonesia's Perusahaan Listrik Negara (PLN) and the Sri Lankan sovereign, however, are bucking this trend. They provide evidence that Japanese investors are becoming receptive to a more diverse group of borrowers from the region once more.
Could this be a sign of greater things to come? One of the most striking differences between 2019’s and 1996’s volume figures is that only eight borrowers accounted for the former and 29 for the latter.
If Samurai bond investors are willing to delve further into quasi-sovereign and corporate territory, then issuance volumes could rocket. The Samurai market would once again become a key constituent of an Asian borrower’s toolkit just as it was before the Asian Financial Crisis and Japanese Financial crisis caused the country’s banks to pull away from the region.
The way back has been led by Asian sovereigns, which have been increasingly attracted to Samurais for geopolitical and benchmark reasons. So far this year, there have been deals for Indonesia, Malaysia and the Philippines.
In particular, the Republic of Indonesia has taken full advantage of its 2017 upgrade to investment-grade status. In May this year, the Baa2/BBB/BBB rated sovereign raised ¥177 billion ($1.62 billion) through the largest-ever public Asian sovereign Samurai bond.
Its six-tranche deal caps a successful diversification strategy, which should now pave the way for more quasi-sovereign issuers such as the country's electricity generator and distributor, PLN, which has filed for a deal and Indonesia Eximbank, which has long been interested in tapping the market too.
The Samurai format should especially appeal to quasi-sovereign borrowers since they are eligible for simplified disclosure requirements that do not apply to private sector entities. Bankers also believe their deals will be well received by Japan’s risk-averse investor base.
The success of sovereign-rated India Exim Bank stands testament to that.
In late August, the Baa2/BBB-/BBB- rated credit raised ¥32 billion on an unsecured basis from a three- and five-year bond offering led by Daiwa, Mitsubishi UFJ Morgan Stanley, Mizuho, and SMBC Nikko. The shorter tranche was particularly successful, closing three times covered.
| *Short term and money market bonds are excluded from bond table | ||||||
| Asian-Issuer Samurai Bond Volume | Asian-Issuer Samurai Loans Volume | |||||
| Priced Year | Deal Value USD (m) (Proceeds) | No. | Priced Year | Deal Value USD (m) (Proceeds) | No. | |
| 1995 | 4,170 | 15 | 2009 | 1,282 | 4 | |
| 1996 | 4,993 | 29 | 2010 | 348 | 3 |
Can Indian corporates take advantage of the quasi-sovereign’s lead? Until recently, it was the Samurai loan market, which was a fertile hunting ground for them.
Last year was characterised by a win-win situation. Borrowers were able to tap new pools of liquidity, while Japanese banks were happy to move further down the credit and maturity curve to pick up yield at a time of negative interest rates back home.
There have, however, been growing signs of short-term indigestion and investor selectivity, as limited country lines get used up. It may, therefore, take a while for banks to get comfortable with all the new credits that have accessed the market before they open country lines further.
Borrowers consequently now need to work harder to find demand especially at the longer-end of the curve. The yen-dollar basis swap is also no longer as favourable as it was earlier this year: moving to -50bp at the five-year part of the curve.
As Siong Ooi, MUFG’s co-head of Debt Capital Markets (bonds and loans Asia) puts it: “Indian borrowers have been able to extend their maturity profile beyond the five-year tenors they were achieving a few years ago. But liquidity really does taper off once they get to 10-years, especially in light of increasing supply at this part of the maturity curve.”
Ooi also adds that spreads have widened. On the plus side, this provides Japanese bank investors with a better relative value proposition.
But it does mean that borrowers are paying more and need to be careful about how often they tap the same funding source. Energy conglomerate NTPC, for example, returned to the market in the space of less than one year.
As a result, it had to pay 10bp more in yen-Libor terms for the $300 million equivalent loan it closed in March compared to the $350 million equivalent one in April last year. This year's 10-year deal also attracted only one bank in general syndication compared to eight in last year's one.
RELIABLE BORROWER
Japanese bankers believe that if Indian credits want to access yen-denominated funding on a regular basis, they need to adopt a longer-term approach that will enable them to penetrate deeper into the market. Reliance Industries is a good example of how this should work.
Like NTPC, the Baa2/BBB+/BBB- credit has also come back to the yen markets in the space of a year. But crucially, it has not experienced diminishing appetite.
Its recent upsized $1.85 billion dual-currency term loan, signed in late June, encompassed $500 million equivalent in yen. This was split into two tranches: one with a 5.25-year average life and all-in pricing of 88.5bp over yen-Libor and one with a 5.5-year average life and all-in pricing of 91.5bp.
It had the normal three megabanks as mandated lead arrangers and bookrunners: Mizuho, MUFG and Sumitomo Mitsui, plus Credit Agricole.
Two other Japanese banks, however, came on board as mandated lead arrangers in the pre-deal syndication phase for the first time: Development Bank of Japan (DBJ) and Norinchukin Bank. The two also each took $75 million to $100 million onto their books, compared with the $20 million to $30 million sized tickets with which Japanese banks had previously felt comfortable.
Reliance attracted six banks at the next rung down too. These banks took up a further $85 million equivalent in paper, which meant that more than 55% of the yen loan ended up being placed in general syndication.
By comparison, Reliance syndicated 35% of its ¥53.5 billion stand-alone Samurai loan last April. At the time, this represented the market’s largest-ever corporate Samurai and had a longer seven-year maturity, attracting nine regional banks.
The company’s head of financial resources, Vineyesh Sawhney, notes that 11 out of Japan’s top 15 regional banks are current lenders to the group.
Part of Reliance’s success is undoubtedly due to its status as India’s most highly rated international credit: piercing the sovereign’s BBB- rating by two notches on the S&P side and by one from Fitch.
It also bolstered its credentials by taking a step-by-step approach to the market. In 2014 it utilised export credit agency backing from the government-owned Japan Bank for International Cooperation (JBIC), before entering the market on an unsecured basis in 2018.
Sawhney says that Japan is a market which rewards patience and ongoing dialogue.
“We made additional efforts to translate our marketing as well as our financing documents into Japanese,” he told FinanceAsia. “Investors there also want to build long-term relationships so it’s important to meet them on a regular basis.
“We’ve been holding annual roadshows in Japan for the past six to seven years,” he added.
He says this is beneficial for Reliance in other ways too since the country does not just represent a long-term liquidity pool, but also an “opportunity to cross-sell on the business side and trade side”.
Augusto King, MUFG’s co-head of Debt Capital Markets (bonds and loans Asia), agrees. “Japanese investors can take a long time to get comfortable and sign off higher credit limits,” he explained. “But once they do, they’re very sticky with the relationship.”
Aside from the diversification benefits, Sawhney says that yen funding has offered a pricing advantage on an after-swap basis for the past two years.
“The 2018 loan had a seven-year maturity but was very competitive on an after-swap basis against shorter-term paper in the US dollar market,” he commented. “The Yen component of the 2019 deal was also competitive compared to the US dollar-based cost for the new loan.”
When it comes to issuing Samurai bonds, Sawhney acknowledges that the market is not yet ready for 10-year maturities by Indian credits. India Exim’s two-tranche deal was notably shorter.
Consequently, Reliance is now focusing its attention on the dollar market where spreads have been on fire.
The group’s dollar bonds have witnessed a contraction of about 180bp to 200bp year-to-date and Sawhney says that he is now considering his “liability management options” given the group has no need for new funding.
“It’s an extraordinarily attractive market right now as spreads are back to where they were two years ago,” he commented. “It’s going to be a record-breaking year for Asian bond issuance.”
HIGH-YIELD ASIAN SAMURAIS
When it comes to the market’s sweet spot for credit ratings, the answer has historically been at the single-A level. But that is changing.
Tatsuya Yasuda, head of international DCM at Nomura, calculates that roughly 80% of international yen bonds (including Samurais) carried a single-A rating or above back in 2015. In 2018, the percentage had dropped to about 50%.
Meanwhile, BBB or lower-rated credits climbed from 17.5% to 46%. Yasuda says those ratios have remained largely the same this year.
Investment grade, therefore, still remains the limit of where most Japanese investors feel comfortable.
“Although the market has been diversifying significantly, it will take time before it becomes open for non-investment grade issuers,” Yasuda concluded.
One of the few high-yield sovereigns globally that has successfully tapped the market is Turkey.
In 2017, the then Ba1/BB/BB+ rated credit managed to close a ¥60 billion three-year offering with a 1.8% coupon. The private placement deal was supported by JBIC through its GATE facility (Guarantee and Acquisition toward Tokyo market Enhancement).
JBIC had previously had a lucky escape when it decided not to follow through with an MOU it had signed with Malaysia’s 1MDB for a Samurai bond in 2013. Instead, it backed an extremely successful, large and politically symbolic ¥200 billion privately placed Samurai bond for the Government of Malaysia this March.
There is a growing queue of issuers hoping to take advantage of Japan’s desire to use its guarantee facility to exert its soft power and counterbalance China’s growing global financial power. They include Ghana, Egypt and Sri Lanka.
Earlier this month, the Sri Lankan government announced that JBIC would provide a 95% credit guarantee for a $500 million equivalent deal it hopes to bring to market around October.
JBIC rarely ventures into high-yield territory, but Sri Lanka is an obvious candidate to help. The two countries have had an extremely close bilateral relationship spanning nearly 70 years and Japan will be keen to reinforce that at a time when China has been making big inroads into Sri Lanka through its Belt & Road Project.
GEOPOLITICAL BARRIERS
The same close relationship cannot be said of South Korea and China, both of which have extremely complicated relationships with each other and Japan. During the first half of the year, South Korea had been one of the bright spots of the Samurai bond market.
Korea National Oil Corp (KNOC) raised ¥70 billion from a debut three-year deal in January, which represented the largest ever single tranche corporate Samurai from Asia. Since then, there have issues for Korea Telecom and Korean Airlines, guaranteed by Kexim.
The escalating trade war between South Korea and Japan, however, looks set to curtail further issuance during the final four months of the year. The two countries have displayed increasing hostility towards each other ever since South Korea president Moon Jae-in decided to ignore the painstakingly re-negotiated 2015 agreement covering World War II compensation, not to mention a radar-locking incident with a Japanese plane.
Where China is concerned, issuers have sporadically accessed the yen markets, but historically never felt the need to educate investors, or build long-term relationships because of plentiful liquidity back home. One sector where bankers believe this could change is green finance.
Bank of China incorporated a ¥30 billion tranche to its multi-currency green bond last November, issued via its Tokyo branch. Lead managers encompassed all the major Japanese bond houses – Daiwa, Mizuho, Nomura and SMBC Nikko.
Nomura’s Yasuda points out how keen Japanese investors are to invest in ESG instruments. His colleague, Alister Moss, head of fixed income syndicate for Asia ex-Japan, agrees.
“Japanese insurers have always been the country’s biggest ESG investors,” Moss commented. “But the pool is expanding as institutions like the Japan Government Pension Investment Fund start to invest as well.”
Many credit Japanese insurance funds as Asia’s most sophisticated green bond investors, although they still remain behind their European counterparts when it comes to the thoroughness of their due diligence. As long as an issuer gets its bonds certified through a second opinion, then that is generally enough.
But their appetite is one that Asian borrowers should be able to take advantage of in both dollar and yen funding. That investor engagement further underlines a shift that is taking place in Asian bond and loan markets, although it remains early days.
Asian borrowers have always been dollar-obsessed. The yen was once an important part of their funding, but in recent years, most eyes turned to if and when the Chinese renminbi would steal the greenback’s crown.
Recent activity shows that the third currency of the world’s G3 should not be written off. On the contrary, it could well be on its way back to re-claiming the status it once held 20 years ago among Asia’s borrower base.
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