Bonding with samurai

Shoppers pick up goods at a Wal-Mart store in Japan. Japan's consumer prices are rising at the fastest pace in a decade, discouraging households from spending and slowing economic growth. Bloomberg News

Corporate borrowers are turning to Japan for cash that is becoming increasingly hard to get anywhere else in the world.

Debt sales in Japan by overseas issuers from Bentonville, Arkansas-based Wal-Mart Stores Inc, the world's largest retailer, to Zurich-based bank UBS AG rose 37 percent to 2.03 trillion yen ($18.5 billion) this year from the same period of 2007, data compiled by Bloomberg show. Sales of so-called samurai bonds may exceed 3 trillion yen this year for the first time since 1996, according to Merrill Lynch & Co.

The lowest Japanese government-bond yields in three years are encouraging investors in the world's second-largest economy to buy higher-coupon corporate debt. Wal-Mart's offering of 100 billion yen of samurai bonds on July 24 was the first by a foreign retailer in 29 years. The 2.01 percent coupon on the five-year portion of the sale was less than the 4.25 percent on similar-maturity notes sold in the US on April 8.

"It's the easiest and cheapest market in the world at the moment," says Mana Nakazora, chief credit analyst for Japan at JPMorgan Chase & Co in Tokyo.

While sales are booming in the world's second largest economy behind the US, new corporate bond issues in America are down 13 percent this year and 16 percent in Europe, data compiled by Bloomberg show.

BMW to Citigroup

Besides Wal-Mart and UBS, Royal Bank of Scotland Group Plc in Edinburgh, and Citigroup Inc of New York also tapped the samurai bond market this year. Munich-based Bayerische Motoren Werke AG, the world's largest maker of luxury cars, sold so- called euroyen notes to Japanese investors in April.

Samurai bond sales are also climbing as Japanese banks, which have accounted for less than 3 percent of the $501 billion in writedowns and losses on securities tied to subprime mortgages as measured by Bloomberg data, seek investments at higher yields than what government securities pay. The yield on Japan's benchmark 10-year notes fell to 1.215 percent in March, from 1.985 percent in June 2007 and below the average over the past five years of 1.55 percent.

Japanese lending

Lending by financial institutions, excluding credit associations, rose 2 percent in both June and July, the first back-to-back increase of that magnitude since early 1996, according to Bank of Japan figures released Aug. 8. The amount of US syndicated loans fell to $453 billion this year from $1.33 trillion in the same period of 2007, Bloomberg data show.

Demand for notes from government-linked institutions such as the top-rated Asian Development Bank or World Bank may increase after Japan's economy contracted last quarter, bringing the country to the brink of its first recession in six years.

Sovereign and quasi-sovereign samurai bonds "could be sold well" because they're not as tightly linked to the economy as manufacturers, says Yuuki Sakurai, a general manager for investment planning in Tokyo at Fukoku Mutual Life Insurance Co.

"Corporate Japan is earning money from exports and if the world economy is not doing very well, that means slower growth in the Japanese economy," says Sakurai of Fukoku, which manages the equivalent of $54 billion. "We shouldn't take some kinds of corporate risk."

'Complete no-brainer'

"You could argue much of the deals done this year got done cheaper than they could in their traditional markets," says Alan Schmoll, head of cross-border yen syndication at Merrill in Tokyo. "It's a complete no-brainer. For any issuer that's got a big borrowing program this year, they're all looking at it."

Samurai bonds, or yen-denominated debt sold in Japan's domestic market, are named after the nation's feudal warrior class famed for their sharp, curved swords. The Manila-based Asian Development Bank, funded by regional governments to reduce poverty, sold the first samurai bonds in 1970. Sales of 3 trillion yen would be the most since the record 3.87 trillion in 1996, according to data compiled by Nomura Holdings Inc.

Wal-Mart yield

Wal-Mart increased its samurai sale to 100 billion yen from 60 billion yen. As part of the sale, the company issued 25 billion yen of five-year debt rated Aa2 by Moody's Investors Service, or the third-highest ranking. The notes yielded 50 basis points, or 0.5 percentage point, more than yen swap rates, a benchmark for borrowing in Japan.

The US retailer sold the debt at yields lower than what investors may have demanded from its Japanese unit Seiyu Ltd, a household-goods chain. Tokyo-based Seiyu, ranked one step above bankruptcy by Mikuni Credit Ratings, "cannot sell any bonds without support from Wal-Mart," says Fumihito Gotoh, an analyst at UBS Securities Japan Ltd.

A Wal-Mart spokesman, John Simley, declined to comment on the company's sale of samurai bonds.

'Stay diversified'

BMW's finance unit sold 15 billion yen of three-year notes in April to yield 56 basis points more than the three-month London interbank offered rate for yen, or about 1.47 percent. Two months earlier, it issued $53 million of floating-rate notes of similar maturity to yield 51 basis points more than three-month dollar Libor, or 3.16 percent. The notes were rated A1.

"The funds were used to refinance BMW's financial services business," Eckhard Wannieck, a Munich-based spokesman for BMW, says of the carmaker's euroyen note. "The main goal is to stay diversified. We always want attract a broad range of investors by issuing different funding instruments."

BMW's yen-denominated bond priced about 10 basis points below the cost of default protection on the German carmaker after currency adjustments, according to arranger Merrill Lynch. Yield spreads below the cost of credit-default swaps indicate stronger demand because the income investors receive on the note isn't enough to hedge against a repayment failure.

Credit-default swaps are used to protect against or speculate on default. The price increases as perceptions of credit quality deteriorate.

Paying more

Yields on samurai bonds sold by financial companies may rise because many Japanese investors bought their fill of the debt in the first half of the year, says Koyo Ozeki of Pimco Japan Ltd, a unit of Pacific Investment Management Co in Newport Beach, California.

"In the last couple of months, deals like UBS are paying slightly more" than previous bank borrowers in Japan, says Ozeki, head of Asia-Pacific credit research in Tokyo at Pimco, which runs the world's biggest bond fund.

UBS sold 47 billion yen of five-year, 2.82 percent notes on June 19 as part of a larger 91.5 billion yen offering. The securities, rated Aa1, were priced to yield 120 basis points more than yen-swap rates. Royal Bank of Scotland, a unit of the second-largest UK bank, issued 141 billion yen of samurai bonds in June for the first time. As part of the sale, RBS issued 55 billion yen in five-year, 2.59 percent notes rated Aaa to yield 95 basis points more than yen swaps, according to Daiwa Securities SMBC Co, an arranger.

If the companies sold securities in the US with the same maturity, the coupons would have probably been about 6 percent, according to a Merrill index of banks rated between AA and AAA.

Agencies

(China Daily 08/18/2008 page11)