A revival of the Samurai market is underway and Latin American sovereign borrowers are once again seeing the appetite for yen-denominated bond issues that prevailed in the mid-1990s. Emerging market issuers flocked to the Samurai market last year, attracted by Japan’s flat domestic interest rates, a surge in liquidity and a yearning for higher yields.
But is this revival sustainable? Could the Samurai market emerge as a true third market for Latin American sovereigns? Or is this just a brief opportunity created by a wave of cash-flush retail investors looking for better returns?
Daniel Gleizer, a director at Brazil’s central bank, thinks there is a long-term investor base in Japan for Latin American sovereigns. In fact, he says he hopes to see Brazil “become a brand name” there.
Prior to 1997, the Samurai market for Latin American sovereign issuers was buoyant. According to Capital DATA, Latin sovereigns issued 17 bonds in the Samurai market in 1995. Between 1993 and 2000, Mexico issued the largest amount of debt, raising $6 billion. Argentina issued $5.7 billion, but came to the market 18 times. Brazil was the third largest issuer, raising $4 billion with 13 issues between 1993 and 2000.
But the yen market dried up completely in 1997 after the Asian crisis erupted. There were no Samurai bond issues in 1998. Latin American sovereigns, like other emerging market borrowers, were cut off from an alternative market in which to raise funds.
The first Latin bond issue in the yen market after Asia’s financial meltdown came in December 1999, when Argentina was able to raise ¥20 billion with a four-year bond paying a 5.4% coupon. Argentina has tapped the Samurai market twice since then, with a ¥60 billion, four-year bond led by Merrill Lynch Securities Tokyo and Nomura Securities, and a ¥61.5 billion bond led by Nikko Salomon Smith Barney and Nomura.
According to Thierry Capelle, director of capital markets at Nomura Securities in London, Argentina used the Samurai market to diversify its exposure to dollars and expand its investor base, as well as to refinance ¥100 billion of maturing debt. Despite issuing two bonds, Argentina did not saturate the Samurai market. Brazil tapped the Samurai market twice in 2000, issuing two ¥60 billion bonds. In September 2000, Mexico also came to the yen market to widen its investor base, securing a ¥50 billion, four-year Samurai bond, but with a lower coupon of 2.25%. Alex Saldarriaga, vice president of quantitative research at Standard Miami, says Mexico was able to achieve more competitive pricing than both Argentina and Brazil, based on its strong macroeconomic framework.
With an increasingly jittery dollar market and anxiety over Argentina, the yen market was one of the few open to emerging market issuers at the end of last year. Latin American sovereign issuers are taking advantage of the surge in interest among Japanese investors in emerging market sovereigns and the higher yields they offer. Jack Gunn, head of debt syndicate at Merrill Lynch in Tokyo, says liquidity is the biggest driver behind the increased appetite. “There is a lot of liquidity in Japan at the moment. Regional financial companies like [insurance] companies, banks and pension accounts have lots of cash that has headed towards the fixed income market.”
The biggest source of this liquidity is around $100 billion in teigaku postal savings deposits, which Japanese retail investors deposited in five- and 10-year savings accounts in 1990 and 1991. These are maturing between April 2000 and April 2001. With nearly flat interest rates in Japan, retail investors are unable to achieve the 6% to 8% rates of interest that they once enjoyed on these bonds and are seeking higher-yielding investments with strong credits.
Saichuro Miyaoka, co-head of global primary markets at Nomura Securities in Tokyo, estimates that about 50% to 60% of retail investors will probably reinvest in teigaku deposits, but the rest will look for higher-yielding investments in the bond and equity markets. Sovereign emerging market issues fit the bill, offering these investors greater returns with the level of security that they traditionally prefer.
The abundance of liquidity coupled with low issuance from Japanese corporate borrowers has fueled demand for emerging market sovereign paper. As Gunn at Merrill Lynch points out, the supply of bond issues in the domestic corporate market is relatively light. With Japanese companies paying down debt and restructuring, they haven’t needed to borrow to fund growth, he says.
“The Japanese government injected a huge amount of capital into Japanese commercial banks,” adds Nomura’s Miyaoka. “They started extending loans to corporates at very favorable rates. That has kept them away from the bond market.”
But there has been no shortage of foreign issuers tapping the Samurai market to take advantage of the liquidity and low interest rates. Institutional investors have focused their attention on strong US names, such as IBM, Ford and a series of self-led deals from global financial institutions, such as Citigroup. In spite of this competition, Latin American sovereign issuers are still popular with Japanese retail investors. Capelle says Nomura Securities places around 80% of all its Latin American sovereign issues with retail investors.
Miyaoka says name recognition is the biggest factor for Japanese investors. Retail investors may not be as probing as institutional investors and are more likely to invest in names they recognize that offer attractive returns.
Japan’s retail investors tend to buy and hold, and consider sovereign risk more stable than corporate risk, says George Aruda, director of Latin America fixed income at Nomura Securites in São Paulo. In fact, Aruda says, “Japanese investors feel very comfortable with Brazilian risk.”
Gleizer, of Brazil’s central bank, agrees. He says Brazil has the largest Japanese community outside Japan, with around one million people in São Paulo, many with strong familial ties to Japan.
“Brazil is striving to develop a loyal Japanese investor base,” Gleizer says, and he is encouraged by the enthusiastic response to its last two Samurai issues. Brazil initially tapped the market in March 2000 with a ¥60 billion, three-year issue that paid a coupon of 4.5%, which was placed equally with retail investors and institutions. Brazil came to the market again in November with a ¥50 billion, 63-months bond with a coupon of 4.75%, which was mainly placed with retail investors.
In addition to establishing its name with a broad range of Japanese investors, according to Gleizer, “Brazil is trying to reach well-defined yield curves in the three main currencies: dollar, yen and euro.” Pricing was also a consideration. Gleizer says although Brazil paid a higher coupon of 4.75% for its November issue, the maturity was extended to five years and three months, up from three years on the first issue. Thus, the spread between yen Libor and the global yield curve tightened from the 11.2% in March to 10.9% on the November issue.
Aruda says that Brazil was able to borrow at a “very competitive rate,” particularly with weaker emerging market sovereign credits such as Tunisia and Croatia raising finance in the Samurai market earlier in the year. Other bankers agree, appraising it as “an all-round aggressively priced deal.” Aruda says despite volatility in the international markets, the appetite for Brazil’s ¥50 billion November bond was so strong that the deal was oversubscribed and increased to ¥60 billion.
Gleizer says that as well as diversifying the country’s investor and currency base, Brazil is “defining a curve in the market that we think will come to life.”
Others are more cautiously optimistic. Dan Vallamarescu, managing director of debt capital markets at Merrill Lynch, says he sees the volume of issuance in the Samurai market picking up and the development of a third major market as healthy for Latin American sovereign issuers. But growth depends on sustained liquidity and the continued interest of less critical retail investors.
Another unanswered question is whether traditionally conservative Japanese retail investors in a thriving Samurai market will expand their investments beyond sovereign credits. Jack Gunn sees opportunities for a broader range of issues in the Samurai market, but doubts that Japanese investors are ready to absorb corporate risk.
The success of a recent ¥40 billion, four-year bond issued by BNDES, Brazil’s state-owned development bank, with a coupon of 4.75%, underscores Gunn’s view that, for the time being, “Japanese investors typically prefer to see some sort of government sponsorship, whether ownership or a quasi-guarantee.”