Japanese Banks Stung by Lehman Collapse

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Pricier Borrowing?

But what's worrisome for credit-starved banks and other corporate borrowers, the Lehman collapse could make it more expensive to raise capital in Japan. Since the subprime meltdown began last summer, Japan has become a haven of funding for many global financial institutions that have raised money by issuing Samurai bonds, or yen bonds issued in Japan by non-Japanese companies. With interest rates so low in Japan, investors here have been eager to buy higher-yielding securities. The low-rate environment makes Samurai bonds a cheaper way to raise capital than other markets, such as Europe and the U.S. where the credit crunch has made lenders stingy. That explains why in June, companies sold more than $8.1 billion in Samurai bonds.

For now, raising money in Japan is still a steal compared with trying to raise money from investors in Western markets. For a 10-year Samurai bond, the rate might be 2.5%; to issue a similar bond in the U.S. a company would have to offer well over 5%, according to traders. Last week, Citigroup's (C) three-year-bond issuance was the biggest ever, totaling 315 billion yen, more than $3 billion. Credit Suisse (CS) and Australia & New Zealand Bank announced issuances, as did Daimler (DAI). Société Générale, Deutsche Bank (DB), and a unit of British utility National Grid had all been planning their own Samurai sales this week. Merrill Lynch (MER) had previously predicted that Samurai bond sales could amount to near $29 billion this year, the highest total since 1996.

But funding costs on Samurai bonds have shot up—spreads over Libor are more than three times what they were in early 2007. And some analysts think Lehman's collapse might now make Japanese investors more risk-averse. Lehman tapped the market last May, when it sold 22 billion yen ($210 million at current conversion rates) worth of 10-year Samurai bonds. "When Lehman issued Samurais last year, many Japanese investors didn't think twice about risk and just bought them," says Yutaka Ban, chief credit analyst at Shinko Securities. "They are now becoming aware of the risks."

Hall is BusinessWeek's technology correspondent in Tokyo. Tashiro is a correspondent for BusinessWeek based in Tokyo.