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CommentAugust 1 2013

Daiwa makes US and Europe push

The first yen issue for Slovakia since 1994, a debut Finnish non-sovereign samurai bond deal and a growing number of dollar mandates are raising the profile of the debt capital markets team at Japan's Daiwa
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Daiwa makes US and Europe push

After a slow start to the year, the samurai bond market is again in good health and attracting a number of new names. While pointing out that the yen is not its only forte, Daiwa Capital Markets underscored its samurai credentials with a recent inaugural transaction from the Slovakia. This, it says, had the lowest coupon ever seen for a debut sovereign issuer.

However, the ‘debut’ status is a technicality on one level, given that the National Bank of Slovakia issued in yen in 1994. That was back in the days when some central banks regularly issued as proxies for their sovereigns. The attractions of these yen-denominated instruments sold by foreign issuers to Japanese institutional investors have changed little since then. They provide investor diversification with no overlap at competitive rates.

“The investor base is 100% Japanese and totally complementary,” says Vince Purton, Daiwa’s London-based head of debt capital markets (DCM) for Europe and the Middle East. “They do not buy these credits in non-yen currencies. If [the same names] issue in dollars or Swiss francs, there will be no Japanese investors present.”

Reliable investors

As Mr Purton explains, yen-based investors will take currency risk and they will take credit risk, but never both at the same time. So, they might buy World Bank AAA rated bonds in a variety of currencies, but an eastern European sovereign only in yen. Another virtue of the samurai is that the Japanese do not buy to trade but to place under the mattress to maturity. The fact that prospectuses usually have to be translated into Japanese is a deterrent, as is the long-winded and obligatory registration process during which market conditions may change radically. Given Japanese interest levels, however, the market is cheap, as long as the costs of swapping the proceeds back into a more convenient currency remain favourable.

“It is more difficult to persuade investors to buy the credit in the first place,” Mr Purton acknowledges. “That takes time. But once they are convinced of the story, they will hold the paper and then buy the second deal and the third. It becomes a stable, long-term relationship, in the classic Japanese way.”

It follows from this that the Japanese market is less obsessed with liquidity than, say, the European market, where some investors will not participate in sub-€1bn issues. “In Japan, you can issue the size you need, in the maturity you need,” says Mr Purton.

Samurai volumes hit a record $18.6bn in 2011, followed by $16.3bn in 2012, according to Dealogic. This is not vast, accounting for between 1% and 2% of yen issuance, but it has withstood the ebbs and flows of the broader market. For example, Japan’s electric power companies, which used to make up 6% to 7% of the domestic bond market, stopped issuing after the 2011 earthquake and tsunami. Samurais were able to provide an alternative for those investors still looking for a spread to Japanese government bonds.

“Some electric power companies are coming back, but not to the extent they used to, so there is still some extra support for samurais,” says Mr Purton. “All things being equal, annual volumes should continue to compare well with recent times.”

Looking for diversification

Slovakia has long been aware of the benefits of issuing in yen, but as an EU and then a eurozone rookie, its first priority was to establish itself as a borrower in euro. It began currency diversification in January 2012, raising SFr425m ($452.6m) in six- and 10-year tranches, and followed that up with a 10-year $1.5bn issue in May.

Daiwa bid unsuccessfully on the 1994 yen deal and has been in dialogue with the Slovaks ever since, latterly via the national debt agency, Ardal. Samurai investors see Slovakia as an attractive credit, with its slowing but still positive growth, trade and current account surpluses, low inflation and manageable debt. A non-deal roadshow in Tokyo in late 2012 uncovered strong investor interest and, in March 2013, Daiwa was awarded a mandate for a yen issue, alongside SMBC Nikko Securities.

There was virtually no new samurai paper in the first quarter of this year thanks to the competing charms of the US dollar market. Then along came 'Abenomics' and its promise of a weaker yen come repayment time, together with more unsettled conditions in other markets. This brought issuers back in, starting with Rabobank in mid-May. The Dutch bank, a veteran samurai issuer, raised Y101.5bn ($1.02bn) in three- and five-year tenors, both fixed and floating rate. Daiwa was joint bookrunner with JPMorgan, Nomura and SMBC Nikko.

Daiwa also acted on a Nordea Bank issue a couple of weeks later. This was Nordea's second ever samurai, but the first from its new shelf programme. The Y91.2bn deal echoed Rabobank’s, with fixed and floating versions of the same maturities. “The shelf programme proves that Nordea is there for the long term,” says Mathias Hultgren, Daiwa executive director DCM, responsible for Scandinavian coverage. “And this transaction set a new pricing reference floor in the market.”

Two in one

Slovakia finally came to market in mid-June. It had hoped to issue in 10-year maturity as well as three and five, but investors preferred to stick with the shorter dates. Ultimately, it raised Y25.8bn in three-year paper with a 0.72% coupon (yen Libor plus 35 basis points [bps]), and Y4.2bn repayable in five years, with a 0.99% coupon (yen Libor plus 45bps). This was the first debut sovereign samurai issue without a Japan Bank for International Cooperation guarantee since Hungary in 2004. Despite its relatively small size, the issue obtained benchmark status and, as Ardal made clear, will pave the way for future yen issuance.

The same day, Daiwa and SMBC Nikko were also joint bookrunners on Pohjola Bank’s inaugural samurai, totalling Y30bn across three- and five-year fixed tranches with a five-year floating rate tranche. The fixed-rate tranches priced at 16bps and 17bps over yen swaps, respectively, with the floating rate note at 27bps over yen Libor. This was the market’s first Finnish non-sovereign bank issuer.

Dollar presence

Daiwa has also been growing its presence in the US dollar market. “We made an active decision to increase our dollar profile and have hired senior salesmen and traders accordingly,” say Mr Purton. “We now do 15 or 16 dollar benchmark deals each year, compared to our usual four deals just a few years previously.”

One recent dollar outing was a three-year $500m deal for Eurofima, the railway rolling stock financing supranational. It was priced at three-month US dollar Libor plus 10bps, 20bps tighter than last September’s inaugural three-year floating rate benchmark. “Daiwa was mandated twice in a row,” says Helene Mercelat, a DCM manager covering French-speaking and Swiss financial institutions and sovereign, supranational and agency (SSA) accounts.

Another string to the Daiwa bow is the socially responsible investment (SRI) bond or 'themed bond'. Daiwa was the first bank to introduce these to the Japanese uridashi (non-yen retail bond) market, where they have proved popular. The first was the 'vaccine bond' introduced by the International Finance Facility for Immunisation (IFFIm). This supranational raises money, backed by sovereign donor pledges, to fund immunisation programmes by the public-private global health partnership, GAVI Alliance. In June, Daiwa and Deutsche Bank were joint bookrunners on IFFIm’s latest vaccine bond, raising $700m for three years at three-month US dollar Libor plus 19bps.

“This was only IFFIm’s second US dollar deal and its first floating rate note,” says Carlos Perezgrovas, Daiwa executive director of DCM and a specialist in SSA origination. Daiwa’s other SRI deals have been many and various, including 'climate awareness bonds', 'water bonds' and 'poverty reduction bonds'. Among this year’s examples have been a South African rand 'microfinance bond' for the International Finance Corporation and a rand/Australian dollar 'agri bond' for Rabobank. 

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