Japanese Economic Woes Benefit Global Investors in Samurai Bonds
By JASON SINGER
Staff Reporter of THE WALL STREET JOURNAL
March 8, 2001
TOKYO -- If there's a silver lining in Japan's bleak economic cloud, a handful of developing countries and a host of multinationals may have found it.
As Japan shows signs of sinking yet again into recession, foreign companies and governments are taking advantage of the country's ultra-low interest rates to raise cheap cash by issuing so-called bonds -- debt denominated in yen and registered in Japan by foreign entities.
Bankers say that by borrowing yen from Japanese investors, countries including Croatia, Uruguay and Brazil -- and companies such as Deutsche Telekom AG -- are saving as much as several percentage points in borrowing costs. That is even accounting for the expenses of converting those yen into other currencies, and of hedging against the risk that the yen will appreciate sharply and thus make the debt more expensive to repay.
The value of new Samurai issues more than tripled last year to 2.34 trillion yen ($19.6 billion), according to the Japan Securities Dealers Association. Bankers expect the total to rise again this year as borrowers float new bonds to replace maturing Samurai debt. Others are simply taking on more Samurai debt, having raised cash from the market in recent years. Tunisia, for one, is preparing an issue for this month after completing its first last year.
Such deals make the portfolios of investors like Katsuhiko Kaneko look like a mini-United Nations roster. "We've bought a lot of Samurais, including Turkey and others in Eastern Europe," says Mr. Kaneko, chief portfolio manager at Aetna Heiwa Life Insurance Co. "The spread between [Japanese government bonds and the debt of] these countries is very wide, and we need to invest in some high-yield bonds."
Samurai bonds attract Japanese investors because they yield more than most other investments available to them; they attract foreign borrowers by being so cheap. Samurais are priced to yield a small premium to Japanese government debt, which carries some of the world's lowest fixed-interest returns: Ten-year Japanese-government bonds yield 1.24%, compared with 5% for comparable U.S. debt.
Samurai issuer Uruguay -- which has an investment-grade credit rating -- pays just 2.2% for the 30 billion yen of five-year bonds it issued last month, compared with the 7.6% it pays for five-year dollar borrowings. After including currency-conversion and hedging costs, the yield is close to what Uruguay pays to borrow in the U.S. or Europe. But selling debt in Japan is still attractive for issuers such as Uruguay, because Japan is flush with investors ready to snap up its debt, providing it with another source of funding.
Other borrowers, however, including Argentina and Brazil, have enjoyed outright savings by placing a larger portion of their issues -- as much as 50% -- with smaller Japanese investors rather than professional money managers more sensitive to yield gaps. Japanese investors feel the higher Samurai yields offset the risk of putting their money in developing nations. Many money managers are putting more of their yen-denominated assets into higher-yielding bonds and switching out of stocks, bankers say. The Nikkei Stock Average recently traded near a 15-year low.
"We are seeing high levels of liquidity looking to fixed-income because of the equity weakness," says Jack Gunn, a debt-markets official at Merrill Lynch & Co. in Tokyo, which arranged Uruguay's offer.
Another inducement to Japanese investors is the dwindling supply of new domestic bonds from Japan's debt-laden companies, which are trying to reduce debt rather than borrow more. That's leaving a hole that foreign borrowers are happy to fill. "With the slow economy, there is less capital spending, and therefore less funding is required in the corporate sector," says Rob Richards, who is in charge of Japanese corporate and government ratings at Standard & Poor's.
During the past 12 months, the low cost of borrowing via Samurais has attracted companies such as International Business Machines Corp., Fiat SpA and DaimlerChrysler AG. According to Nikko Salomon Smith Barney Ltd., the second-biggest arranger of Samurai bonds last year, 1.7 trillion yen of the bonds will mature this year and next. That's preparing "solid ground for continuous high volume in this market," because borrowers are expected to replace much of that maturing debt with new Samurais, says Nikko Salomon managing director Tatsuro Higashi.
Bankers say more Samurais are finding their way into the hands of individual investors, who are seeking new places to put cash long stashed in Japan's low-yielding postal-savings accounts. More than $1 trillion of postal savings matures this year and next. For the fourth quarter of 2000, about 25% of maturing postal deposits was moved outside of the system. About $135 billion is expected to flow out this year.
Peter Morgan, an economist at HSBC Securities Japan Ltd., says: "We expect over half of the outflow of funds to be invested in domestic bonds." |
