Bloomberg News

BBB Rated Borrowers’ Yields Slide to Record Low: Japan Credit

August 21, 2011

Aug. 22 (Bloomberg) -- The decline in the benchmark rate for BBB rated borrowers to a record low and relative yields at the narrowest in five months may urge borrowers including All Nippon Airways Co. and Acom Co. to tap the market.

The extra yield investors demand to own bonds rated the lowest investment grade instead of government debt fell to 47 basis points on Aug. 19, the lowest spread since March 21, according to Japan Securities Dealers Association prices on Bloomberg. Average yields on five-year bonds rated BBB fell to 0.78 percent on Aug. 19, the lowest since Bloomberg started collecting the data in 1997.

Demand for riskier debentures is rising as the withdrawal from the market of nuclear-plant operators after the March disaster pushes Japan’s corporate bond sales to the lowest in five years. Mizuho Trust Banking & Co.’s Credit Spread Strategy fund, the country’s top-performing bond fund, earlier this month said it will invest in lower-rated corporate bonds.

“This isn’t about fundamentals but rather plain supply and demand -- the money managers simply have little choice,” said Fumihide Goto, a Tokyo-based analyst at UBS AG. “The investors would prefer more yield from BBB bonds, but everyone is chasing the few available deals and the spread continues to tighten.”

Sales of corporate bonds fell 60 percent to 976 billion yen ($12.7 billion) in the three months through June 30, compared with a year earlier, according to data compiled by Bloomberg. That’s the lowest quarterly amount since Bloomberg began collecting the data in 1999.

BBB Sales

In July, companies rated BBB by risk assessors Rating and Investment Information Inc. and Japan Credit Rating Agency Ltd. sold 89 billion yen worth of bonds, the most since December, when they issued 109 billion yen worth of debt, according to Bloomberg data.

Acom, which was downgraded to BBB+ from A- by R&I in December 2010, raised 48 billion yen in three bond issues since the March 11 earthquake and tsunami, according to the data. The consumer finance company may sell more debt, spokesman Masayuki Miyauchi said.

“There is demand in the market, so given the right term, interest and spread our strategy is to issue bonds aggressively,” Miyauchi said. He declined to elaborate.

The Tokyo-based company has 115 billion yen in bonds due in the 12 months to October 2012, Bloomberg data showed. Acom reported 97.4 billion yen in cash and near cash items in the quarter ended June 30.

Cash Holdings

Excluding financial companies, members of the Topix Index amassed a combined 59 trillion yen in cash holdings, Bloomberg data show. That’s a 27 percent increase from three years ago.

“The market is awash in capital, while at the same time companies are hoarding cash,” said Yoshihiro Nakatani, a Tokyo- based senior fund manager who helps oversee 82 billion yen at Asahi Life Asset Management Co., in a telephone interview. “Investors looking for yield have to consider BBB bonds.”

Hankyu Hanshin Holdings Inc. plans to sell 10 billion yen worth of five-year bonds, according to an on Aug. 19 statement from Daiwa Securities Capital Markets Co. The spread on the railway operator’s bond last issue, announced on the day of the quake, more than doubled to 37 basis points on Aug. 18.

All Nippon Airways, rated BBB+ by R&I, has 20 billion yen in bonds due this year, according to Bloomberg data. Asia’s largest publicly listed carrier, which last sold debt in April 2010, plans to use its more than 30 billion yen in cash for repayment, said spokesman Ryosei Nomura.

“The disaster has tipped the demand and supply balance in the bond market and we are seeing a trend for narrowing spread, especially for BBB rated companies,” Nomura said. He declined to comment on plans to issue bonds.

Utility Debt

Tokyo Electric Power Co., the eighth-biggest issuer of corporate bonds last year, was downgraded to below investment grade on May 30 by Standard & Poor’s after the reactor meltdown at its Fukushima Dai-Ichi plant.

Kansai Electric Power Co., Japan’s second-largest operator of nuclear reactors, and regional power provider Kyushu Electric Power Co. pulled bond sales in June amid concern about safety and compensation liabilities. Kansai Electric’s 2.17 percent bonds due July 2016 yielded 0.71 percent on Aug. 19, from 0.676 percent the day of the quake, according to JSDA prices on Bloomberg.

The utilities, which comprise about 20 percent of outstanding corporate bonds, retired a net 835 billion yen worth of debt since the quake, according to Bloomberg data. If refinanced, the bonds would have accounted for 23 percent to the debt market in the period, Bloomberg calculations show.

BBB Vs AAA

The extra yield investors demand to own five-year bonds rated BBB by R&I, rather than AAA rated notes, reached 26.7 basis points on Aug. 19, according to data compiled by Bloomberg. The spread versus AA rated debt narrowed to 10.6 basis points, the lowest since July 22.

The yield on the nation’s benchmark 10-year bond slid half a basis point to 0.98 percent on Aug. 19 in Tokyo, the lowest this year, according to Japan Bond Trading Co., the largest inter-dealer debt broker.

Mizuho Trust’s fund is increasing its allocations to riskier notes following Standard & Poor’s unprecedented downgrade of U.S. credit coupled with the European sovereign debt crisis, the fund’s manager Nobumasa Mizutani said in an interview on Aug. 10. Credit Spread Strategy is the biggest among 396 yen-denominated funds that invest in Japanese corporate bonds managed by investors based in Japan, according to data compiled by Bloomberg.

S&P’s downgrade of U.S. credit and Europe’s sovereign debt troubles sparked a sell-off in stocks and corporate bonds this month. Treasuries, the Swiss franc and gold jumped.

Yen’s Strength

The yen reached a post-World War II high of 75.95 versus the dollar in New York trading on Friday, spurring speculation the Bank of Japan will move to weaken the currency. The yen retreated to as low as 77.21 per dollar in Tokyo today and traded at 76.80.

The Markit iTraxx Japan index of credit-default swaps rose 6 basis points to 139.5 on Aug. 19, according to CMA, which is owned by CME Group Inc. The risk gauge advanced from 98 a day before the earthquake, the data show.

Contracts to insure Japanese government debt against default for five years rose 3.5 basis points to 107.5 on Aug. 19, according to the latest CMA prices.

Credit-default swap contracts pay the buyer face value in exchange for the underlying securities if a borrower fails to meet its debt agreements.

--With assistance from Kiyotaka Matsuda, Bill Austin, Emi Urabe and Patrick Chu in Tokyo. Editors: Brian Fowler, Patrick Chu

To contact the reporters on this story: Pavel Alpeyev in Tokyo at palpeyev@bloomberg.net; Yusuke Miyazawa in Tokyo at ymiyazawa3@bloomberg.net

To contact the editor responsible for this story: Brian Fowler at bfowler4@bloomberg.net


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