The Development Bank of Japan (DBJ) priced a $1 billion five-year bond deal yesterday -- the largest bond transaction ever by the government agency in the US dollar supra-sovereign agency market. The notes, which are set to mature on April 20, 2015, are rated Aa2 by Moody's and AA by Standard and Poor's.
The bonds will pay a semi-annual fixed-rate coupon of 2.875% and were re-offered at 99.456 for a yield of 2.993%.
Initial guidance was set at mid-swaps plus 27bp, which one banker on the deal said was in line with where other Japanese government agencies were trading in the secondary market.
Arrangers of the deal noted very little price sensitivity for the announced guidance and indeed the bonds were priced at 27bp over mid-swaps, which at the time of pricing was equivalent to a spread of 41.4bp over the five-year US Treasury yield.
By late afternoon in Asia yesterday, the new bonds had tightened to 38bp over Treasuries.
"The spread against Treasuries is quite important for some investors" said Makoto Wakamatsu, director of debt capital markets at Barclays Capital Japan. This is the case even though swap spreads have been tightening.
One banker close to the deal said the pricing occurred on the back of volatile market conditions with Treasury spreads having been "quite unstable" over the past three weeks.
When DBJ initially looked to come to market in late March, five-year swap spreads were quoted in the region of 30bp, but at the time of execution they had tightened considerably to 13.25bp, which is almost 16.25bp move in over a three week period.
The deal was 1.4 times subscribed, having attracted $1.4 billion worth of orders from just 50 accounts.
DBJ last came to the US dollar market in December 2009 with a $350 million five-year floating-rate trade. This time around DBJ issued a benchmark deal in a fixed-rate format, thus attracting a more diverse range of investors than on the previous deal.
Asian investors accounted for the bulk of the demand (65%), followed by European investors with 21%, Middle-Eastern investors with 9% and US offshore investors with 5%. There was strong support from central banks and financial institutions for the deal. Central banks lapped up 49%, banks 28%, fund managers 12% and other investors 11%.
"A $350 million size doesn't always meet investor requirements," said Wakamatsu, referring to DBJ's previous dollar transaction. "The $1 billion issue gives a liquid benchmark, which Asia investors in particular are comfortable with," he added.
This deal is viewed as a strategic funding exercise for DBJ. Wakamatsu added that it "will serve as a cornerstone for DBJ to penetrate further into the supra-sovereign agency market".
In addition to this deal, DBJ has upsized its existing medium-term note programme to support its efforts to access the international market. Prior to this, the use of the MTN programme came without a guarantee. The amended structure allows more leeway and also makes it possible to issue bonds with or without a guarantee.
"Looming concern over European sovereigns' financial viability has led to a resurgence of dislocation in the supra-sovereign agency market," said Tetsuya Koboyashi, head of debt capital markets for HSBC Japan. "However, the US dollar SSA market continues to demonstrate resilience to turmoil in Europe and investor demand for high-quality instruments has been kept intact."
Given this market backdrop, the arrangers decided to tap the US dollar market on the back of healthy demand for Japanese government guaranteed bonds. Also, the swap spreads between US dollars and Japanese yen are in the issuer's favour.
It is expected that as long as these market conditions remain in place, there will be more Japanese issuers, acting on an arbitrage basis that will look to access the international capital markets.
Barclays Capital and HSBC were lead arrangers on the offering.