It takes a lot to convince Japanese investors to invest in the international private sector these days. After the shambles caused by the bankruptcy of Lehman Brothers and Icelandic banks which tapped the Samurai market last year, local investors are understandably suspicious.
But spurred by a lack of corporate supply ahead of the end of the fourth quarter of the Japanese financial year, and low yields on government backed entities, Japanese investors have warmly welcomed Westpac's ¥245.3 billion ($2.72 billion) multi-tranche Samurai/euro-yen issue, backed by a wide-ranging Australian government guarantee, and the first Samurai since September 2008.
The joint bookrunners were Daiwa SMBC, Nikko Citi and Nomura Securities, with Nikko Citi sole-lead on the euro-yen issue. The deal priced Monday.
It is Westpac's third visit to the Samurai market and it is the largest ever Samurai by an Australian bank. Due to the strengthening yen, it is also the biggest Samurai (excluding the euro-yen portion) in US dollar terms, according to Dealogic.
"It was smart of Westpac to do this huge deal early in the year. There will be less money left for those coming later," estimates one source, and referring to the announcement by ANZ Bank to also tap the Japanese market.
The Samurai portion, rated triple-A by both Standard and Poor's and Moody's, comes in two fixed tranches and one floating tranche. The first two tranches amount to ¥11.8 billion and ¥133 billion and the floating tranche to ¥56.5 billion. The maturity date is 2012 and 2014 for the two fixed tranches respectively, and 2014 for the floating tranche. Coupons for the fixed tranches are 1.27% and 1.70%, while the floating tranche is three-month yen libor +70bps. The re-offer spread on the fixed tranches is 40bps over three-year swaps and 70bps over Japanese five-year swaps respectively. The euro-yen portion amounts to ¥44 billion, expiring in 2012 and with a re-offer spread of 40bps.
A rival banker told FinanceAsia that the pricing on this issue represented a "nice, fat spread by Japanese standards" and a "must-buy" for a wide range of Japanese investors, "especially Japanese regional banks", taking into account that Japanese government-backed institutions were offering yields of around 20bps, and that Japanese government bond yields have actually being going down.
However, a Japanese institutional investor who did not buy into the bond said that he would be surprised if Japanese financial institutions expressed interest in the issue, given the horrendous losses they have suffered on the Japanese stock market. (Japanese banks have a large exposure to the stock market, often in friendly companies, as part of the historical anti-takeover defence mechanism.) "I can't see Japanese banks and insurance companies having surplus cash to spare to invest in this issue," he notes, "Particularly when even good companies in Japan are having trouble issuing commercial paper. But I can see pension funds investing."
But according to a banker close to the deal, financial institutions were pretty well represented in certain tranches. Regional banks bought 18% of the three-year fixed Samurai for example, while city banks bought 34% of the five-year fixed Samurai, and 60% of the five-year floating Samurai.
The rival banker says that Japanese institutional investors are hamstrung by their reluctance to buy anything under triple-A, and that bankers are trying to gently take them down the curve. He mentioned the double-A rated Asahi Glass and TDK issues earlier this year as examples of deals that were somewhat below the traditional credit hurdle, but that went well. In any case, the conservative nature of Japanese investors makes the government guarantee the perfect sweetener.
The investor also suggested that the deal would go down well with retail investors, but a banker close to the transaction said the bonds had not been marketed to retail investors, but that another Samurai deal for ANZ, which will price early next week, had a retail portion.
Says the rival banker: "While there has been a renewal of suspicion for foreign issuers in Japan, Australia has very strong economic trading links with Japan, and it's in the same time zone. That would have contributed to the comfort factor for Japanese investors." It was also the Australian government's familiarity with Japan that allowed them to guarantee Westpac's yen issuance, when other foreign governments have been uneasy about guaranteeing issues which are not in their domestic currency, the banker believes.
According to a banker with knowledge of the deal, some 230 institutional investors in Japan participated, and that the euro-yen tranche was "in response to very strong demand from Japanese investors". The banker added that "the three-year Samurai tranche priced at the tight end of the 40bps-50bps guidance, and the five-year Samurai tranche priced in the middle of the 65bps-75bps guidance."
All credit then to the Australian government for coming out with a well-crafted guarantee. Unfortunately, it only covers financials rather than the industrial sector, or the Australian surge into Japan would be even bigger.
