Since May 2011, borrowers looking to access the very deep Japanese domestic investor base have had an alternative to the traditional Samurai option in the form of a listing on the Tokyo Stock Exchange’s Pro-Bond market.
So called because the placement and subsequent transfer of securities is limited to professional investors, the principal appeal of the market is the simplicity of listing relative to the Samurai market, where the issuance process can be costly and time-consuming.
As the Japan Exchange puts it, “the Tokyo Pro-Bond market allows for flexible and timely issuance of bonds reflecting [the] market environment by streamlining procedures to greatly simplify disclosure documents necessary at the time of issuance without compromising the quality of information for investors.”
Filing and disclosure for Pro-Bond issuance can be in English or Japanese, which is important, as a Clifford Chance briefing explains. “Considering that most Samurai bonds use Japanese as the binding language for filing and disclosure documents (as well as transactional documents), this fact alone may be of particular interest to non-Japanese issuers offering bonds to Japanese investors for the first time.” This is because it “allows considerable cost savings in terms of fees of lawyers and auditors (which translate the disclosures and financial statements, respectively) as compared to a debut Samurai bond issue,” the law firm advises.
Pro-Bond issuance can be on a standalone or programme basis. Programmes have generally come in two formats, the first of which, as Clifford Chance explains, is a Samurai bond alternative listing cleared through the Japanese clearing system, Jasdec. This was the type of listing chosen by ING Bank, which was the first issuer to access the Pro-Bond market with a ¥50.7bn ($462m) offering in 2012. In the case of a Samurai alternative, notes the Clifford Chance briefing, the issuer has generally prepared “tailored, Japanese law-governed terms and conditions which follow the Samurai bond practice (rather than the euro/global MTN practice).”
The other option for issuers on the Pro-Bond market, Clifford Chance explains, is to take an existing euro or global MTN programme base prospectus, and put a Pro-Bond wrapper around it. “In this type of listing, the programme will usually be pre-existing, and the bonds will typically be English or New York law-governed, clearing through Euroclear, Clearstream, Luxembourg or DTC,” notes Clifford Chance.
A third option for issuers using the Pro-Bond market is a hybrid of the alternative Samurai and existing MTN format, which was first used by Metropolis of Tokyo for a $1bn five year bond in May 2015, which was also the first foreign currency issue on the market.
The Pro-Bond market had an encouraging start, attracting a strikingly diversified range of new borrowers from Europe, North and South America, the Middle East and Asia. Examples of listings in 2016 included those from issuers in the US (Citigroup and Bank of America), Latin America (Banco Latinomericano de Comercio Exterior), China (ICBC) and Spain (Santander Consumer Finance).
“Issuance volume on the Tokyo Pro-Bond market increased year by year between 2014 and 2016, whereas issuance on the Samurai market declined over the same period,” says Koji Ito, senior officer, new listings, at the Japan Exchange. “The main reason for this is that the cross-currency yen to dollar basis swap widened, which meant that the cost of issuing yen-denominated bonds surged.
“However, while the Samurai market only offers the opportunity to issue yen-denominated bonds, one of the benefits of a listing on the Tokyo Pro-Bond market is that borrowers can issue in multi-currency format,” he says.
2017 — slow start but good prospects
New issuance activity this calendar year on Pro-Bond has been slow relative to the previous two years. Between January and the end of June there were only four new issues, all of them from domestic borrowers: MassMutual Life Insurance (Japan), Japan Exchange Group, JFM and the Metropolis of Tokyo.
Vince Purton, managing director at Daiwa Capital Markets Europe Ltd in London, says that although volumes this calendar year have been modest, this is in line with lighter activity across all yen markets compared with 2014 and 2015. This, he says, chiefly reflects the fact that arbitrage opportunities have been more challenging recently for many international borrowers in the Japanese market in senior unsecured format. The majority of these have no natural requirement for yen and are therefore dependent on a favourable basis swap to make the economics of issuance work.
From both a supply and a demand standpoint, however, Purton says that the arguments for issuing in Pro-Bond format are as relevant as they have ever been and that the longer-term outlook for the Pro-Bond market remains healthy.
One of these, says Purton, is the speed with which issuers with a Pro-Bond programme in place can access the market, which may offer an increasingly appealing additional format even for borrowers that have already issued in the Samurai market. “We may see some established Samurai borrowers start looking at Pro-Bond on an occasional basis as an additional tool to their standard Samurai platform rather than a replacement for it, and particularly when not focusing on issuing in large benchmark size,” he says. “Instead, they may be attracted by the possibility of using Pro-Bond as a way of rolling over a maturing issue, or issuing a smaller, opportunistic private placement, structured, or club deal-type transaction.”
This is because of the flexibility a Pro-Bond programme can offer compared with the Samurai market. As Purton explains, there is a shorter interval between mandate, soft sounding, official marketing and pricing.
In a market where windows of opportunities can open and shut at the whim of a notoriously fickle and unpredictable basis swap, that is a benefit that is not to be sniffed at. “For borrowers with an opportunistic rather than a strategic reason for accessing the yen market, the Pro-Bond market may be a good way of responding more quickly to favourable movements in the basis swap,” says Purton.
MREL and TLAC potential
There are other more sector-specific reasons international borrowers studying the potential of the Japanese market may have a preference for going down the Pro-Bond route. For example, Purton sees considerable potential for some bank borrowers with sizeable requirements for total loss-absorbing capacity (TLAC) and minimum requirements for eligible liabilities (MREL) capital to use the Pro-Bond market as a means of maximising the diversification of their funding.
“In terms of the TLAC and MREL debate, there are certain jurisdictions where there is either a requirement or a preference for transactions to be launched under local law,” says Purton. “This suggests that for those issuers affected by such guidance and looking to access the yen market, there could be a preference either for global yen or Pro-Bond issuance, rather than in Samurai format where issuance has always been under Japanese law. Equally, of course, there are many regulatory funding jurisdictions where the Samurai route remains available and compelling.”
In 2017, there has been mounting evidence that European banks are warming to the potential of the Pro-Bond market as a funding source, with Swedbank and UBS among those that have listed new programmes on the platform. “We have already seen Citigroup using the market to raise ¥81.6bn of TLAC debt in February 2016, and I expect some other large global banks to come to the Tokyo Pro-Bond market instead of the Samurai sector for the purpose of TLAC bond issuance,” says Ito.
Among investors, meanwhile, the response to recent issuance from European banks such as France’s BPCE in the Samurai market suggests there would be no shortage of demand for TLAC and MREL debt. “Regional accounts in Japan are increasingly looking at international yen product because overseas credits offer a compelling spread over domestic comparables, especially in senior non-preferred and tier two debt,” says Purton.
It is the low interest rate environment in the domestic market, Purton believes, that has led more and more domestic accounts to explore opportunities for yield enhancement in the Pro-Bond as well as the Samurai markets. “We think the investor base for Pro-Bonds is about 70% of the size of Samurai investor base at present, but likely to increase,” he says. “It will always be smaller, because a number of Japanese accounts can still only buy bonds that are included in the Nomura BPI Index. But the hunt for yield is encouraging more domestic investors to seek internal approval to expand into the Pro-Bond market.”
Ito agrees that investor demand for overseas credits can only continue to grow, underpinning the further expansion of the Pro-Bond market. “Some big Japanese life insurance companies have announced plans to invest a decent amount of funds in non-yen paper without a currency hedge,” says Ito. “So I believe we will see a big change in the behaviour of Japanese institutional investors, which will support future funding in the yen market by overseas issuers.”
Ito says that he sees the Pro-Bond market as “the only globally standardised bond market in Japan” able to serve Japanese and international issuers alike.
His confidence in the prospects for the market is shared by others. “Eventually I believe a critical mass will be reached in the Tokyo Pro-Bond market with the volume and number of issuances and we will see the market adapting to fix technical issues like index inclusion,” says Masaya Mizobuchi, head of global debt capital markets at Mizuho Securities in Tokyo. “In the near term, I see the Pro-Bond complementing the Samurai format for those looking to enter the Japanese market without fully committing to carry on continuous disclosure in the Japanese language.”