Investors cautious about samurais as markets turn volatile

The turbulent markets mean that investors in samurai bonds will favour deals that offer a higher return.
Investors in Japanese debt are turning cautious about samurais bonds, mainly due to a near meltdown of money markets in the United States and the ripple effect on Asian markets.

Debt bankers say samurai bond issuance is likely to be impacted by the turbulence caused by the demise of Lehman Brothers and troubles at insurer AIG, as seen by their reaction to two issues in the past couple of weeks by Citi and Credit Suisse.

ôJapanese investors have turned cautious and are taking each issue on its merits, pricing and coupon,ö says one Tokyo-based debt capital markets banker. He says the Lehman BrothersÆ decision to file for bankruptcy is weighing heavily on the investment decision-making process.

Low interest rates in Japan have spurred demand for samurai bonds this year. Australian, European and American banks have taken advantage of the market in the first two quarters to issue samurais. But as the year stumbles towards the last quarter, DCM bankers are pessimistic about more samurais coming to market.

Citi, the biggest US bank by assets, recently sold a record amount of yen-denominated corporate bonds to retail investors in Japan, taking advantage of strong demand for high yields. The issue comprised Ñ315 billion ($2.92 billion) in three-year samurai bonds with a coupon of 3.22%. (Previously, Matsushita Electric IndustrialÆs Ñ300 billion corporate bond in 2002 was the biggest corporate issue ever sold in Japan.)

The coupon on the Citi samurai was higher than the 2.66% Citi paid when it sold Ñ186.5 billion in bonds to Japanese investors on June 12.

On the other hand, Swiss banking giant Credit Suisse had to scale back its intended issue and ultimately issued Ñ64.3 billion of samurai bonds in three tranches last week.

Credit Suisse Group Finance, part of the Credit Suisse Group, says it sold Ñ20 billion in five-year fixed-rate notes, Ñ7.3 billion in three-year floating-rate notes and Ñ37 billion in five-year floating-rate notes.

The five-year fixed-rate notes have a 2.41% coupon. The three-year floating-rate notes have a spread of 90bp over three-month yen Libor, while the five-year floating-rate notes have a spread of 110bp over the same benchmark. All three tranches were issued at par.

A second DCM banker says it was the coupon that made the difference. He says CitiÆs issuance had a greater appeal as the coupon rate was better.

He adds that international issuers who like samurai bonds for the low interest rate should take a second look before issuing bonds in the current market environment because investors will turn to issues that offer a high return like the Citi samurai.

Samurai bonds are yen-denominated instruments sold by non-Japanese companies or institutions to investors in Japan.
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