Bloomberg News

Korea Finance Offers Samurais as Yields Diverge: Japan Credit

September 15, 2011

Sept. 15 (Bloomberg) -- Korea Finance Corp., the state- owned financier, entered Japan’s debt market for the first time to tap the lowest relative cost to borrow since February 2009 compared with the rest of the world.

Formed in 2009, Korea Finance offered so-called Samurai bonds today, selling 30 billion yen ($391 million) of securities, according to data compiled by Bloomberg. Sales of yen-denominated debt by Korean borrowers have more than doubled to a record 275 billion yen this year from the same period in 2010, the data show.

Foreign borrowers are able to raise cash in Japan at yields averaging 110 basis points more than benchmarks, compared with 247 in the global corporate bond market, Bank of America Merrill Lynch indexes show. The difference of 134 basis points, close to the widest since Feb. 20, 2009, has expanded from 43 in April as investors assigned a higher risk to holding debentures outside Japan while the global economic recovery slows and the fiscal crisis in Europe deepens.

“The Japanese bond market is somehow detached from the widening spreads in overseas market,” said Kyoko Kaji, a Tokyo- based credit analyst at Nomura Securities Co.

While a government report this week showed that large manufacturers in Japan became more optimistic about their business outlook during the third quarter, the Asia Development Bank cut its 2011 estimate yesterday for the nation’s economy to a 0.5 percent contraction from its previous estimate for a 1.5 percent expansion.

Near-Zero Rates

Borrowing costs in Japan dipped to a four-month low as the Bank of Japan kept its key interest rate near zero last week to stoke growth and combat deflation. Yield premiums in the U.S. and Europe have climbed on speculation Greece will default, deepening the debt crisis and crippling economic growth.

Spreads on Samurai bonds have widened 13 basis points, or 0.13 percentage point, since the end of June, while those for global bonds have expanded 83 basis points.

Korea Finance, based in Seoul, today priced 15.5 billion yen of two-year, 0.99 percent bonds to yield 60 basis points more than the yen swap rate. The lender also sold 7.5 billion yen of three-year, 1.11 percent notes at a spread of 70 basis points, and 7 billion yen in five-year, 1.36 percent debt at 85 basis points, according to the data compiled by Bloomberg.

“The market’s ample liquidity and demand for short-term bonds are the reason for the sale,” said Kim Heung Sang, Seoul- based head of the global funding team at Korea Finance. “Japanese investors prefer short-term bonds because of the ultra-low domestic borrowing cost.”

Relative Spreads

Korea Finance was formed in October 2009 after being spun off from Korea Development Bank to handle policy financing, such as the bailout of Hynix Semiconductor Inc., in the wake of the Asian financial crisis.

The 70 basis-point spread on the three-year notes compares with the 20 paid by Japanese trading company Sojitz Corp. on its similar-maturity 0.6 percent securities on Aug. 30, according to data compiled by Bloomberg. The Tokyo-based company is rated BBB- by Standard & Poor’s, or four levels below Korea Finance.

“We used to be doubtful of the strength of the Korean economy, but seeing it in good condition over the last few years shifted our view and the certainty is increasing,” said Yoshihiro Nakatani, a Tokyo-based senior fund manager who helps oversee 98 billion yen at Asahi Life Asset Management Co.

Posco, South Korea’s biggest steel maker, hired BNP Paribas SA, Daiwa Securities Group Inc., Goldman Sachs Group Inc., HSBC Holdings Plc. and UBS AG for a sale of Samurai bonds, according to a person with direct knowledge of the matter today.

The company last sold Samurai bonds in June 2006 when it raised 50 billion yen from a sale of 2.05 percent notes at a spread of 32 basis points more than the yen swap rate, Bloomberg data show.

Inflation Target

President Lee Myung Bak said on Sept. 8 that the country’s inflation may exceed the 4 percent target this year. The Bank of Korea kept its benchmark rate unchanged at 3.25 percent for a third month on the same day and said it may not be able to increase borrowing costs until “external” issues such as Europe’s debt crisis are under control.

A record 14-month rally in Samurai bonds ended in August after securities issued by Bank of America Corp. lost 3.16 percent and Goldman Sachs Group Inc.’s debt posted a 1.78 percent loss, according to Bank of America Merrill Lynch index data. Bonds offered by Korea Gas Corp. returned 0.36 percent.

No U.S. or European financial institution has offered Samurai bonds since July 22, after selling 415.6 billion yen in the same period a year earlier, Bloomberg data show. Oslo-based Eksportfinans ASA was the last European borrower in the market, selling 30 billion yen of 0.72 percent debt to yield 15 basis points more than the yen swap rate, the data show.

Government Yields

Hana Bank, a unit of South Korea’s fourth-largest financial company, issued 30 billion yen of Samurai bonds on Aug. 4, including 8.3 billion yen of three-year, 1.42 percent notes at a spread of 99 basis points, according to Bloomberg data. On the same day, Westpac Banking Corp., Australia’s second-biggest lender, raised 100 billion yen from a sale that included 74.4 billion yen of five-year, 1 percent notes at a spread of 47.

The yield on Japan’s benchmark 10-year bond was little changed at 0.99 percent today in Tokyo, after touching the lowest level since November on Aug. 19, according to Japan Bond Trading Co. Ten-year Treasury yields slid to a record 1.88 percent on Sept. 12.

Export-Led Recovery

The yen gained versus all 16 major counterparts yesterday and traded as high as 76.70 per dollar today in Tokyo. The Japanese currency appreciated to a post-World War II high of 75.95 per dollar on Aug. 19, threatening to derail Japan’s export-led recovery.

The Markit iTraxx Japan index of credit-default swaps fell 4 basis points to 158 basis points as of 9:40 a.m. in Tokyo, Citigroup Inc. prices show. The risk benchmark was at 164.5 basis points on Sept. 13, the highest level since May 2010, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. The index climbed from 98 the day before the earthquake.

Credit-default swaps protect bondholders against default and traders use them to speculate on credit quality. A drop signals improving perceptions of creditworthiness, while an increase suggests the opposite. The contracts pay the buyer face value in exchange for the underlying securities if a borrower fails to meet its debt agreements.

Contracts to insure Japanese government debt against default for five years fell 0.5 to a record 122.3 yesterday.

--Editors: Patrick Chu, Pavel Alpeyev

To contact the reporters on this story: Yusuke Miyazawa in Tokyo at Taejin Park in Seoul

To contact the editor responsible for this story: Shelley Smith at

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