September 19, 2016 / 2:12 AM / 2 years ago

Improving swaps lure foreign issuers back to Samurai bonds

* Better funding costs drive European lenders to return to yen market

By Frances Yoon

HONG KONG, Sept 19 (IFR) - Japan’s Samurai bond market is staging a comeback after an improvement in cross-currency swap spreads put the country back on the radar for international issuers.

Standard Chartered was the first to take advantage of the improved conditions, with a five-year senior bond on September 8 that marked the first Samurai issue in almost two months. The five-year yen/euro basis swap has narrowed from -56bp in mid-June to -37bp, while the yen/dollar equivalent has shrunk from -96bp to -82bp.

A less negative swap translates to a lower premium over euro or US dollar Libor for companies that borrow in yen.

Sources say French banks are now closely monitoring markets as they look to follow StanChart’s lead, breathing life into a sector that had stalled due to volatile yen rates and Brexit fears.

None of the French lenders have mandated for Samurais yet, said a banker close to the talks.

The last foreign issuer to sell Samurai bonds in Japan was Mexico’s state-owned oil company Petroleos Mexicanos (Pemex) , which raised 80 billion yen ($783 million) in July.

Higher yields

For the time being, potential Samurai issuers are likely to focus not on the typical senior unsecured format but on higher-yielding instruments such as total loss absorbing capacity (TLAC) and Tier 2 capital, as the Bank of Japan’s negative rate policy leaves investors struggling to find higher returns.

Ultra-tight spreads have led underwriters to market senior unsecured bank Samurais on an absolute coupon basis since the start of this financial year, but TLAC and Tier 2 bonds are still priced off yen offer-side swaps - the traditional benchmark in the Samurai marketing process.

“The Samurai market has rejuvenated itself by marketing on a spread,” said a treasurer at a Double A rated Samurai issuer.

“From the issuer’s perspective, it was hard to work off an absolute coupon because it added another layer of obscurity to see my all-in cost in, say, euros. But off a swap spread, I can come up with a fairly good view of all-ins. As rates have gone up over the past few months, people are back to a normal thought process.”

Standard Chartered issued its 45 billion yen ($442 million) 0.523 percent five-year TLAC-eligible bond at 55bp over offer-side swaps on September 8, opening the market after the United Kingdom’s vote to leave the European Union and demonstrating that Japanese investors were willing to overlook Brexit fears in exchange for a premium.

HSBC wasted no time, coming the following week with a similar 181.8 billion yen triple-trancher across five, seven and 10-years. French carmaker Renault priced a 50 billion yen three-year the same day.

Making ends meet

Yet the Samurai rebound remains fragile due to volatile yen rates, while issuers continue to enjoy extremely competitive US dollar and euro funding due to robust markets there. The European Central Bank’s expanded asset purchase programme has also indirectly helped to drive European banks’ secondary spreads tighter.

“I’ll look at a Samurai but there are better markets where you can get better all-in costs like US dollars. You also get size there,” said the treasurer, who added that he hoped the Samurai market will gravitate towards the five-year space.

But with Samurai spreads so tight, some investors have been moving to longer seven and 10-year tenors to compensate for the lack of return at the short end, which could make it difficult for issuers and investors to compromise.

“The spread level is so tight in global credit markets. I need that. It is important when I consider the credit risk,” said a Tokyo-based Samurai investor. (Reporting by Frances Yoon; Editing by Steve Garton and Daniel Stanton)

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