Bloomberg News

Samurai Sales by Europeans Plunge on Debt Crisis: Japan Credit

October 03, 2011

Oct. 3 (Bloomberg) -- Sales of Samurai bonds by Europeans in the third quarter dropped to the lowest in two years and returns slid as officials in the euro-region intensify efforts to contain the sovereign debt crisis.

Poland, Norwegian lender Eksportfinans ASA, and French lender Banque Federative du Credit Mutuel have sold 82 billion yen ($1.1 billion) of the yen securities since July 1, down 84 percent from the same period a year ago and the least since the three months through March 2009, Bloomberg data show. BNP Paribas SA’s yen notes lost 5.37 percent last month, while Barclays Plc debt handed a negative 1.25 percent return, according to Bank of America Merrill Lynch index data.

Europeans, which have 3.7 trillion yen of Samurai bonds outstanding, or 38 percent of the market, have been sidelined as the debt crisis is spreading from Greece to the core countries of the euro region. Samurai bonds attracted Japanese investors earlier this year with yield premiums as high as three times more than domestic notes, according to index data compiled by Nomura Securities Co.

“Selling Samurai bonds by the French will be difficult now,” Toshiaki Takahashi, who manages 340 billion yen at Meiji Yasuda Life Insurance Co., said in a telephone interview. “There will be some European issuers available, but not those with exposure to Greece, Italy, Portugal or Spain.”

Samurai bonds lost 0.56 percent last quarter, ending the longest quarterly rally that started in the second quarter of 2009. Samurais lost 0.625 percent in September, led by BNP Paribas debt, and posted a 5.63 percent loss on Bank of America Corp. notes, the BofA index data show.

Spreads Widen

Extra yields investors demand to own Samurai bonds instead of government debt soared 24 basis points last quarter to 123, according to the BofA Japan Samurai Index.

The biggest Samurai borrowers in the quarter were Australians, with Westpac Banking Corp. selling 100 billion yen followed by National Australia Bank Ltd.’s 80 billion yen offering, Bloomberg data show. Koreans were second after Korea Finance Corp., Hana Bank and Korea Gas Corp. raised 30 billion yen each, the data show.

“Most Samurai borrowers available at the moment, such as Australians and Koreans, have already tapped the market, and investors’ exposure to those countries is getting full,” Hiroaki Fujioka, a senior credit analyst at Daiwa Securities Capital Markets Co., said. “As for Europeans and Americans, investors want to wait and see at the moment.”

Global Banks

JPMorgan Chase & Co. February sold 111.1 billion yen of the first Samurai bonds by a U.S. bank since Lehman Brothers Holdings Inc.’s collapse in 2008, including 76.9 billion yen of five-year, 1.05 percent notes priced to yield 25 basis points more than the yen swap rate, according to data compiled by Bloomberg. The spread has since widened to a record 116 basis points, prices from Japan Securities Dealers Association show.

“Healthy banks got dragged into the mess, and their spreads also widened,” said Takahashi at Meiji Yasuda. “When they are selling Samurais, I want to buy.”

Spreads on Barclays Bank Plc’s 1.29 percent Samurai bonds due 2015 rose to a record 160.5 basis points Sept. 28 from 70 on Sept. 2, 2010, when the debt was priced, JSDA data show.

European leaders are turning their focus to the next steps to stem the region’s debt crisis after German Chancellor Angela Merkel last week gained support from lawmakers to expand the firepower of the euro-area’s rescue fund.

With the European Commission now expecting the overhauled 440 billion-euro ($586 billion) European Financial Stability Facility in place by mid-October, euro finance chiefs will this week discuss accelerating enactment of a permanent rescue fund that provides more capital and a tool for managing defaults.

Debt Insurance

The cost of insuring against default on European bank debt surged last quarter. The Markit iTraxx Financial Index of credit-default swaps on the senior debt of 25 banks and insurers soared 123.2 basis points to 275.4, according to CMA prices in New York.

French lenders top the list of Greek creditors with $56.7 billion in exposure to private and public debt, according to a June report by the Basel, Switzerland-based Bank for International Settlements.

Societe Generale SA postponed its planned sale of Samurai bonds June 15 after Moody’s Investors Service placed the rating of the bank on review for possible downgrade.

Bank of America also pulled a planned offering of Samurai bonds June 21, a week before the biggest U.S. lender by assets announced it agreed to pay $8.5 billion to resolve claims made by bondholders including BlackRock Inc. over soured mortgages.

Credit Markets

Elsewhere in Japan’s credit markets, Marubeni Corp. plans to sell 20 billion yen in 10-year bonds this week, according to a person with direct knowledge of the matter. SMBC Nikko Securities Inc. and Mitsubishi UFJ Morgan Stanley Securities Co. are helping the trading company with the offering, said the person, asking not to be identified as the information is private.

Makino Milling Machine Co. plans to raise 10 billion yen in a five-year bond sale. SMBC Nikko and Daiwa Securities Group Inc. are helping the manufacturer with the offering. Marubeni is rated A+ by Japan Credit Rating Agency, while Makino is rated BBB+, Bloomberg data show.

Japanese companies raised 2.227 trillion yen in bonds last quarter, up 20.4 percent from the second quarter, after the weakest first half since 2006, according to data compiled by Bloomberg.

The extra yield investors demand to own Japanese corporate bonds, excluding electric power companies and banks, rather than government debt fell 1 basis point last quarter to 22, according to BofA Merrill Lynch Japan Industrial Index.

Yields Rise

Japan’s 10-year government bond yield rose half a basis point to 1.025 percent today, after touching this year’s low of 0.965 percent on Sept. 22, according to Japan Bond Trading Co. The yield dropped 11 basis points last quarter.

The yen traded at 76.99 per dollar today in Tokyo after appreciating to a post-World War II high of 75.95 per dollar on Aug. 19, making it more difficult for Japan to boost economic growth with exports. The currency gained 4.54 percent last quarter.

The Markit iTraxx Japan index of corporate debt rose 5 basis points to 207 as of 9:31 a.m. in Tokyo, Deutsche Bank AG prices show. The measure is headed for its highest close since July 2009, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

Contracts to insure Japanese government debt for five years advanced 3 basis points to 148, according to Deutsche Bank. That’s on track for its highest close ever after an increase of 56.1 basis points last quarter, CMA prices show.

Overseas Issuers

Credit-default swap indexes are benchmarks for protecting bonds 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.

Mexico met with Japanese bond investors in August to gauge demand for its planned Samurai sale before America Movil SAB, Latin America’s largest wireless carrier, held talks with investors last month. Korean borrowers Posco and Korea Development Bank hired banks for their planned yen bond sales, while Nordea Bank AB, the Nordic region’s biggest bank, filed a document last week with Japan’s finance ministry to sell 35 billion yen of Samurai bonds in November.

“European issuers can individually tap the Samurai market, but it is limited to high-grade ones,” said Kazuhide Tanaka, Tokyo-based head of long-term funding at Rabobank Nederland, the largest corporate Samurai borrower this year with the top credit rating both from Moody’s and Standard & Poor’s.

“If there is an opportunity in the market, we will consider the sale, but now we don’t have a concrete plan,” Tanaka said.

--Editors: Patrick Chu, Beth Thomas

To contact the reporter on this story: Yusuke Miyazawa in Tokyo at ymiyazawa3@bloomberg.net

To contact the editor responsible for this story: Shelley Smith at ssmith118@bloomberg.net


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