* Foreign borrowers eye yen bonds for cheap funding
* Monetary easing forces Japanese investors into new markets
* Samurai bonds largely immune to global tensions
By Frances Yoon
HONG KONG, Aug 15 (IFR) - Governments and financialinstitutions are lining up to sell bonds to Japanese investorsas they look to take advantage of record-low yen funding costsin a market that remains isolated from global geopoliticaltensions.
BNP Paribas and Svenska Handelsbanken are looking to issue Samurai bonds as early as next month, whileTurkey is also mulling a deal that would be guaranteed by theJapan Bank for International Cooperation (JBIC), according tobankers familiar with the plans.
The governments of Kenya, Hungary, Indonesia and Poland arealso examining the possibility of issuing sovereign Samuraibonds in the second half of the fiscal year, while a diverserange of Asian issuers are also forecast to come to the yenmarket, including Development Bank of Mongolia and Export-ImportBank of Korea.
Mexican state-run oil company Pemex is alsoconsidering a Samurai issue, treasurer Rodolfo Campos told IFRin July.
The growing pipeline comes as the Bank of Japan's monetaryeasing programme has driven yields on domestic bonds toultra-low levels, pushing more Japanese investors to consideroverseas credits in search of higher returns.
The benchmark 10-year Japanese government bond yield touched a 16-month low on Friday at 0.495%, whilethe five-year domestic benchmark for Single A rated issuers hit 0.348% earlier this month, its lowest yield sinceat least 2010.
The Samurai market, with Japanese language documentation andlocal conventions, has become a popular alternative for thecountry's fund managers. Traditionally reserved for only thehighest-rated foreign issuers and short tenors, the range ofdeals in the pipeline shows the conservative market has begun toopen up.
"Investors are more aggressive than they've ever been as weare finally going down the credit curve," said the banker. "Thiswill be a true testament on how aggressive the market is willingto go."
BUSIEST SINCE 2008
Samurai issuance in the first four months of Japan's fiscalyear reached ¥1.1trn (US$10.75bn), up 37% on the same periodlast year and at the highest since 2008, according to ThomsonReuters data. Japan's fiscal year starts on April 1.
Most bankers are expecting dealflow to remain strong asissuers continue to look for alternatives to US dollar debt andJapanese investors look down the credit curve in search ofhigher returns.
"We may see more than US$2bn in yen issuance by the end ofSeptember," said a senior syndicate banker in Tokyo.
"Geopolitical risks have been rattling global markets, butwe don't see much of that affecting the Samurai market since wedon't see issuers from Ukraine, Israel or Iraq."
Borrowers that have tapped the Samurai market so far thisyear have done so at historically tight spreads, while Europeanborrowers in particular have been able to save on their fundingcosts in their home markets.
French bank BPCE in July priced its three-yearbonds about 13bp inside its euro secondary curve, after swappingthe proceeds back to euros. Its five-year yen bonds also came2bp tighter, even after the European Central Bank's June ratecut prompted euro spreads to tighten.
French carmaker Renault also was able to tightenspreads considerably on a ¥150bn deal in May, before walkingaway with the largest corporate Samurai outside the financialsector since 2005.
French quasi-sovereign bank Caisse des Depots etConsignations set a record for the lowest creditspread for a senior unsecured Samurai bond since the 2008financial crisis, pricing five-year and 5.5-year tranches inJuly, both at 1bp below yen offer-side swaps.
HSBC a month earlier paid the lowest spread for acommercial bank since at least 2000 when it sold a ¥75bn Samuraibond at 1bp over swaps.
THINNEST SPREADS POSSIBLE
Typically, borrowers sell Samurai bonds in tenors of two andthree years, but this year's crop of new issues has includedofferings beyond five years. Mexico, the only sovereign to issueso far this fiscal year, sold its first 20-year tranche and ishoping to replicate its success even if it means issuing at adifferent time of year.
"We have tended to focus on these June, July windows for theyen, but if there are good conditions in the beginning of 2015,we could evaluate that," said Alejandro Diaz de Leon, Mexico'shead of public credit.
Demand from domestic Japanese investors has been so strongthat Malayan Banking was able to price a Pro-bond inthe beginning of August, despite the summer lull. Pro-bonds,like Samurais, also are sold by foreign borrowers, but Pro-bonddocumentation can be submitted in English instead of Japanese,as they are only available to professional Japanese investorsand require fewer disclosure statements.
Not all bankers are optimistic that the bubbly atmospherecan be maintained throughout the year, however.
For one, a move in cross-currency interest rate swaps couldmake yen funding more expensive for overseas issuers - even atsuch low coupons. The five-year dollar/yen cross-currency basisswap reached -44bp on Wednesday, weakening from -39bp a weekago. A more negative number adds to the premium an issuer mustpay to convert yen proceeds into US dollars, making it lessattractive for overseas issuers to borrow in yen.
Another concern is that spreads have reached the thinnestpossible threshold.
"The last time spreads were this tight was in the summer of2007," a Tokyo-based debt origination banker said. "Spreadswidened consequently. The problem is we are now at Libor flat,and the only direction to go from here is up."
"The question is not if, but when." (Reporting by Frances Yoon. Editing by Abby Schultz and SteveGarton)
HSBC Holdings (HSBA)
