Bloomberg News

Eksportfinans Infects Samurais as Banks Lead Slide: Japan Credit

November 29, 2011

Nov. 30 (Bloomberg) -- Samurai bonds are heading toward the first annual loss in three years as investors dump bonds of Europe’s banks following the downgrade to junk of Norway’s Eksportfinans ASA.

Notes denominated in yen by the trade-finance company have lost 1.7 percent this month through Nov. 28, driving the 1 percent loss in bank notes, according to the Bank of America Merrill Lynch Japan Samurai Index. The gauge declined 0.6 percent this year, set for the first drop since defaults by Lehman Brothers Holdings Inc. and Kaupthing Bank Hf of Iceland inflicted a 6.8 percent loss on investors in 2008. Government bonds in Japan have gained 1.5 percent while the nation’s corporate debt lost 1.6 percent this year.

Moody’s Investors Service reduced Eksportfinans’s rating on Nov. 22 by seven steps to Ba1, or one level below investment grade, after Norway’s government declined to exempt the lender from European Union regulatory capital requirements. The downgrade may damp demand for Samurai notes sold by European borrowers, down 67 percent in the second half of this year, as the sovereign-debt crisis that started in Greece two years ago spreads to even the safest economies in the region.

“The Scandinavian agency, which used to be relatively reliable, got these massive downgrades and I don’t know what to believe now,” said Hiroshi Nakamura, who helps oversee 3.3 trillion yen ($42 billion) as general manager of fixed-income investment at Mizuho Asset Management Co. in Tokyo. “There will be an impact in the market for sure, as investors will shun Samurai they don’t really understand.”

Samurais Slump

Eksportfinans’ woes are adding to investor losses on holdings of Greek, Spanish, Portuguese and Italian bonds. Samurai notes sold by lenders including Goldman Sachs Group Inc., BNP Paribas SA and Deutsche Bank AG have declined 1.4 percent this year, compared with a 0.2 percent advance in U.S. banks’ dollar bonds.

The yield on the 0.89 percent bond maturing in June 2015 surged to 9.47 percent yesterday, from 0.64 percent on Nov. 21, according to data compiled by Bloomberg. The yield on the 0.72 percent note due July 2016 rose to 8.66 percent from 0.67 percent in the same week. The bonds have lost as much as 27 percent since they were first sold, the data show.

“The bonds offer reasonable value after the selloff,” said Jani Kurppa, a bond investor in Helsinki at EQ Asset Management Ltd., which manages $1.4 billion and doesn’t own the company’s debt. “The company and owners must next present a credible solution and a plan forward, but until then, bond prices won’t recover much.”

Downgrade

The slump has pressured the broader Samurai market, sending the spread this month up 47 basis points to 191 on Nov. 25, the highest premium relative to Japanese government bonds since October 2009, according to Nomura Securities Co. index data. The jump in November is the most since March 2009, the data show.

Standard & Poor’s followed with a five-step downgrade on Nov. 25 to BBB+, or three levels above junk, and put the company on negative watch. “The government’s decision to end the most important part of Eksportfinans’ business may have triggered a default under our rating criteria,” S&P said, citing the terms and conditions of its Euro medium-term notes program.

“To date no event of default has been declared by any party under any of our agreements,” Martine Mills Hagen, head of funding at Eksportfinans, said on a Nov. 28 conference call with investors. “Eksportfinans has taken legal advice from two separate English law firms and having considered such advice we don’t believe that there’s an event of default.”

Big Presence

Japanese investors hold more than 1 trillion yen of Eksportfinans debt, including its Samurai and Uridashi notes, according to SMBC Nikko Securities Inc. That’s as large as the amount of outstanding bonds sold individually by companies including Tokyo Electric Power Co., Mitsubishi UFJ Financial Group Inc. and Panasonic Corp., SMBC Nikko said.

“That indicates how big the presence of Eksportfinans in the Japanese market is,” SMBC Nikko, the Tokyo-based brokerage unit of Japan’s second-biggest lender, said in research note on Nov. 25. “There could be sales of bonds to make up for the loss and impact on domestic bonds.”

Elsewhere in Japan’s credit markets, Sony Corp., Japan’s largest consumer-electronics exporter, postponed a bond sale that was scheduled for December. Sony made the decision after reconsidering the timing of the sale, Ayano Iguchi, a spokeswoman for the Tokyo-based manufacturer, said by phone.

Default Swaps

The Markit iTraxx Japan index of credit-default swaps for 50 companies fell 8 basis points to 202 as of 9:14 a.m. in Tokyo yesterday, according to Deutsche Bank prices. The benchmark touched this year’s high of 233.4 on Oct. 5, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

The yen rose 0.05 percent to 77.94 against the dollar as of 4:43 p.m. in Tokyo. The central bank spent about 8 trillion yen on Oct. 31 to weaken its currency from the strongest since World War II, according to Barclays Plc and Totan Research Co.

The benchmark 10-year government bond yield was unchanged at 1.065 percent as of 4:45 p.m. in Tokyo, after touching 0.94 percent Nov. 17, the lowest in a year. Ten-year U.S. Treasury yields rose 3.3 basis points to 2 percent as of 6:41 p.m. in Tokyo.

DNB Bank ASA, a unit of Norway’s biggest bank which owns 40 percent of Eksportfinans, plans to sell 20 billion yen of Samurai bonds on Dec. 8, according to a Nov. 22 filing with Japan’s finance ministry.

Eksportfinans has relied on the capital markets in Japan for funding for 25 years and is one of the largest international borrowers there, President and Chief Executive Gisele Marchand said in the most recent financial report.

No Exemption

The company last sold 30 billion yen of five-year Samurai on July 21, after raising 30 billion yen from a five-year debt offering in June 2010, according to Bloomberg data. It had 425 billion yen of yen-denominated Uridashi notes outstanding at the end of June, according to SMBC Nikko.

The company had 36.1 percent of its private funding denominated in yen at the end of June, compared with 47.5 percent in the U.S. currency, according to a statement on its website.

The Norway government decided Nov. 18 not to exempt Eksportfinans from European rules limiting concentrations of large loans, a move that almost eliminated its franchise and business model, Moody’s said on Nov. 22. The downgrade was partly due to “future funding uncertainties,” it said.

“Eksportfinans used to be a typical safe haven with clear involvement of the Scandinavian government,” Takashi Nakagawa, a senior credit analyst in Tokyo at Daiwa Securities Capital Markets Co., said in a phone interview on Nov. 24. “It raised suspicion, unfortunately, although this is unique to Norway.”

--Editors: Pavel Alpeyev, Teo Chian Wei

%JPY NI ASIA NI BNK NI BON NI CECO NI COEVNT NI CONS NI CORPFIN NI COS NI CRA NI CREDITDN NI CREDITCG NI CRUNCH NI DEFAULT NI ECO NI EUROPE NI EXCLUSIVE NI FIN NI FINNEWS NI G7ECOS NI GOV NI GOVMISC NI JAPAN NI JNCREDIT NI MARKETS NI MMK NI NEWBON NI HYL NI NOECO NI NORWAY NI NORB NI ORIGINAL NI URI NI SOVEREIGN NI SAMURAI

To contact the reporters on this story: Yusuke Miyazawa in Tokyo at ymiyazawa3@bloomberg.net; David Yong in Singapore at dyong@bloomberg.net

To contact the editors responsible for this story: Shelley Smith at ssmith118@bloomberg.net; Sandy Hendry at shendry@bloomberg.net


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