The Republic of Indonesia is preparing to reopen the Samurai market amid growing signs that Japanese investors are willing to go down the credit curve in search for higher returns. Indonesia, rated Baa3/BB+/BBB-, is looking to return to the market before the end of June, according to sources close to the transaction. After reducing its reliance on credit support from the Japan Bank for International Cooperation in 2015, its next financing is set to be Indonesia's first entirely standalone Samurai since 1983.
The timing of the offering is indicative of heightened interest among Japanese investors for better returns in exchange for lower ratings, a shift in sentiment that bankers say has been visibly apparent since the Bank of Japan imposed negative interest rates on new fund deposits on January 29. The BoJ's move tightened spreads across the country's local bond market, leaving local fixed-income investors struggling to earn a positive return. The yield on the 10-year Japanese government benchmark stood at minus 0.123 percent at the end of last week.
A successful issue from Indonesia is expected to build momentum for similarly rated trades, transforming a Samurai market that has traditionally been limited to issuer rated much higher, mostly European banks with long track records in the yen market. One Tokyo-based banker said he planned to pitch the yen markets to other Triple B rated sovereigns, especially after witnessing a blowout response last week for Bank of America Corporation's 110 billion yen ($1 billion) Pro-bond.
BofA completed the largest yen trade from an international issuer in nearly a year and priced at the tight end of guidance of 0.39-0.41 percent despite its expected Baa1/BBB+/A rating. That beat Citigroup's 81.5 billion yen 0.457 percent Pro-bond in February this year, both in terms of size and pricing. "It was a big surprise to see that the guidance fell below 0.4 percent," said a banker with knowledge of the transaction. "It opens the door for more overseas issuers, rated BBB and lower, to try to come to Japan to issue bonds."
If demand stays strong, Indonesia may be able to lower pricing further for its upcoming Samurai elative to what it achieved a year ago, when it priced non-guaranteed tranches of three and five years at 87bp and 108bp over yen offer-side swaps, respectively. A 10-year portion, with a JBIC guarantee, priced at 27bp. These levels were considerably wider than the spreads on the most recent Samurai issues, before the market stalled, which, at one point, saw deals price as tight as 1bp inside the benchmark rate.
Change of heart Even if Japanese investors are reluctant to buy BBB rated and sub-investment grade credits from foreign Samurai sellers, the prospect of earning double-digit spreads may be hard to resist amid a dearth of supply. The Samurai market came to a standstill this year after a negative basis swap, the BOJ's negative rate environment and robust US dollar and euro markets weakened the yen's appeal as a funding currency. The yen to euro cross-currency basis swap is at negative 42bp mid at the five-year point, making it unattractive for the European banks that make up the bulk of the market.
The last Samurai issue was in January, when Australian lender Westpac sold a 85 billion yen five-year bond at 10bp over swaps. That bond has ratings of Aa2 from Moody's and AA- from S&P. The cross-currency basis swap, which is sharply negative, has also made it more expensive for Australian banks to access the yen market, but some may still be tempted, due to the depth of the market and ability to broaden their investor bases, according to bankers. Although market chatter says Single A rated French banks, such as BPCE, BFCM and Societe Generale, are monitoring the Samurai markets, offerings may not materialise because the US dollar and euro markets have been constructive recently. To match their funding costs in their home currencies, these issuers may also be aiming for pricing that is too tight for Japanese investors to accept.
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