Japan DCM Roundtable: Part 4

IFR: I’m conscious we’re coming to the end of our time but I did want to pick up on the place of electric power companies in the Japanese bond market. MR Shirota, where will power companies fit into the Japanese capital markets landscape going forward?

HIDENOBU SHIROTA, DAIWA SECURITIES: For power bonds and bond issuance by the power companies, the government is quite involved and it’s not a situation that the issuers themselves can control, certainly in the case of Tepco. The power companies were issuing bonds on a constant basis, which has been suspended, Tohoku Electric Power issued in March but they were forced to offer quite a high spread. That was judged to have been right in a way. There might have been a paradigm shift in bond issuance by the power companies as a result.

What needs to be watched is whether Kansai Electric’s Oi nuclear power plant is going to resume operations. For one, the dependency upon nuclear power plants is important. As a result it may be that there could be some differences in spreads among the power companies. If you look at the secondary market, you already see that this showing up, But in the primary market as well, if issuance is resumed I think there are going to be differences among the power companies in regard to the spread they offer, which is of some concern.

But for those investors who are going to be looking at the credits, they need to judge on their own and look closely at issuers, including their loan borrowings, in order to choose what is right for them from their perspective. I would say that the market process is going to change, including the marketing process as well as the spread. There will be a variation among the issuers as a result.

IFR: Does the opportunity to earn extra spread excite you, MR Yoshida, even though it might involve potential additional risk?

MITSUHIRO YOSHIDA, DAIWA NEXT BANK: Well if issuance is going to be smooth, then it’s an opportunity. But I think it’s going to be very difficult for us to make a decision right away. As we’ve had no supply from the power companies, the spreads of other operating companies have become tighter as a result. Non-issuance by the power companies is affecting the market. After Tohoku Electric, if other companies are able to follow suit and if the market accepts that, then it’s something we should consider.

HIROAKI HAYASHI, FUKOKUSHINRAI LIFE INSURANCE: Well power company spreads have widened and they’re a very attractive investment for us for the time being. Public opinion towards nuclear power plants needs to be looked at, and the companies are being negatively impacted by poor cashflows. The Japanese people are harbouring negative sentiment towards the power companies and the politicians need to consider what to do about the industry.

It looks as though there is lack of transparency if you look at general accounting methods and collateral. But if you’re going to be objective, amortisation of power bonds won’t suffer any problems whatsoever. In that sense, with regard to existing power bonds with wider spreads, we believe we’ve made an excellent investment. Tohoku Electric, for example, had to pay a spread premium. But they wanted to go ahead and issue. We hope others follow suit. As far as these bonds are concerned, I would say that they are the hottest items where we can enjoy a most handsome spread.

As we look at the power industry, there is this issue of the splitting of generation and transmission, which has been discussed since before 2000. For example, Kobe City sources its electricity from Kansai Electric but it’s generated by Kobe Steel. That’s also true with Roppongi Hills, which generates its own electricity. The issue of decoupling hasn’t come out of the blue.

The industry has a lot of issues which are being and will be debated. Things will settle where they’re going to settle. Nuclear power plants are an extremely sensitive issue among the Japanese which we need to watch carefully.

As far as payment on the bonds is concerned, though, I think this is a debate that needs to be conducted separately and in an objective manner. I think the bonds are given an implicit government guarantee, as they are secured with collateral having statutory liens on some of Japan’s most important infrastructure. So as a credit, the power industry is the most attractive, I’d say. Maybe it’s wishful thinking to expect more issuance and other companies to be paying up on spread.

IFR: I’d like to ask the panel their thoughts on which asset class in the credit space they expect to be the hottest going forward this year?

HIDENOBU SHIROTA, HEAD OF DCM, DAIWA SECURITIES: That’s extremely difficult to answer. But I’d say Samurai bonds and Triple B issuance. Issuance of Samurais is about ¥2trn every year but redemptions haven’t been rolled over so we’re watching the market continuously. The European crisis has impeded Triple B issuance and I think this segment is one to watch because it’s been suppressed. And the resurgence of power companies.

IFR: MR Tanaka I guess your pick would be foreign financial I’m assuming.

KAZUHIDE TANAKA, RABOBANK: I am a specialist so can’t speak with any authority on other products.

IFR: So why don’t you give some closing comments; your general sentiment and your outlook?

KAZUHIDE TANAKA, RABOBANK: My outlook for the rest of 2012? Well the advent of the Pro-Bond Market, as I said earlier, will hopefully act as a catalyst for more foreign credits being sold in Japan. Along with perhaps a bigger spectrum of credit in the Samurai market. And as I said in my remarks earlier, a bigger market benefits us all so hopefully if the market grows then we’re set to issue bigger deals.

MITSUHIRO YOSHIDA, DAIWA NEXT BANK: We’re also looking at the Samurai market, From the spread point of view, I would say that Samurais offer better spreads, including Pro-Bonds. In addition, RMBS is an area I’m watching.

MASANORI AZUMA, NORUMA: Bearing the European situation in mind, there’s a very good supply of Samurais. It is sometimes very difficult for issuers to pay the required spread, but some are willing to pay the extra spread to access Japanese investors. Looking at domestic credit, personally speaking I’d like to see the power sector become more active. Current spreads are quite attractive for investors as well.

GEN NAKAHARA, BAML: Even though it was not discussed today, this year sees the Basle III preparatory phase kick in. So I think new Basle III-compliant subordinated bond product might be a possibility for the Japanese banks starting from next year. It will have to include loss absorption clauses so the premium will be there. Looking at the current situation, the default probability of the megabanks is not going to change so there might be some products that provide additional spread.

Bail-in is a concept that might attract a premium. For the highly creditworthy players, what is the risk of a bail in? If there is a risk with some issuers, yen covered bonds is another option we can look at. In the Samurai bond market, even though we have the European situation, financial institutions are issuing in more diversified mode.

I think we can expect to see a more diversified range of Samurai bond issuers, mainly European institutions.

KATSUMASA SUZUKI, MORI HAMADA & MATSUMOTO: I think Dim Sum (Tenshin) bonds in renminbi are a good possibility. There is substantial demand for renminbi so maybe issuers can tap their Eurobond or Pro-Bond programmes in RMB bonds. And even though this is a debt market conversation, the first rights offering will be coming soon, I hope.
IFR: MR Tokushima: your closing comments, please, And maybe give us your prediction about any changes in the shape of the yen yield curve as well.

KATSUYUKI TOKUSHIMA, NLI Research Institute: Unfortunately there is no chance that interest rates will go up this year. So we are trying to reactivate the fixed-income market. Other than straight bonds, there are some new developments that we can expect. Securitised products, not just RMBS, should be revisited. Unfortunately in Japan, since the Lehman bankruptcy, nobody wants to come back. But a securitised market might be a good opportunity to tap investors and offer spread.

In the US, the securitised market is showing some resurgence but it’s not yet coming back in Japan and the FSA has been very slow to respond. Elsewhere, structured covered bonds might be one possibility that should be considered by the authorities. I’d like something new, so that’s something that I’d like to see in the future.

IFR: And last word to you, MR Hayashi

HIROAKI HAYASHI, FUKOKUSHINRAI LIFE INSURANCE: As was said earlier, power bonds are very attractive for the time being. My second point is that at the end of the day, Japan has a stable financial market so it’s going to see concentrated issuance. For example, we’re going to see Samurai bonds, especially from European and American financial institutions, and they’re going to be attractive for us to invest in.

The third point is something that was mentioned in passing in relation to the Basle III. There’s going to be a new type of subordinated bond available. And we have expectations about that. For the first issues, there is going to be quite a nice spread as it’s going to absorb some of the losses. This is something that we watch with interest.

Last but not the least, the fourth point is something that’s already been mentioned. Sony, Panasonic and Sharp, the electronics companies, are paying bigger spreads. They have excellent technology and as long as they’re well managed, there is going to be a revival in issuance. This is another sector in which we’d like to expand our investments.

IFR: Thank you very much. I think we should perhaps bring our session to our close.

It was a lightning tour of Japanese debt capital markets but I think it was also very insightful, so gentlemen thank you so much for all of your comments.

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