The Tokyo Stock Exchange had grand ambitions when it launched Pro-Bonds in 2011.
In outlining a framework for the new debt market a year earlier, the exchange had said to expect that Pro-Bonds would be “as competitive as the Euromarket” and would eventually become “a central bond market for the Asian region”.
For the best part of the last eight years it has been difficult to support these claims.
International issuers have mostly stuck by the most traditional method of accessing capital in Japan: using local debt programmes to issue Samurai bonds.
But since 2018, this has started to change. Amid a boom in international issuance in the yen market, foreign borrowers have begun to embrace new ways of financing themselves in Japan.
Nearly a quarter of all overseas bond issues in yen have arrived in Tokyo Pro-Bond or Euroyen format in the last two years, according to Dealogic data.
This represents a steep increase compared with the years 2015-2017, when Samurai bonds made up about 90% of overall supply volumes.
“As with the introduction of all new formats, there is always going to be an element of inertia at the outset,” says Morven Jones, a managing director and head of debt capital markets for Europe, the Middle East and Africa at Nomura in London.
“But what has happened over the past few years or so is that issuer and investor familiarity with Pro-Bonds has grown to the extent that the Pro-Bond route is now more comparable with what can be achieved in Samurai format.”
The Pro-Bond market was designed to give both Japanese and international issuers a quick and simple way of accessing yen liquidity.
It is therefore easy to see why this route has proven particularly popular among first-time borrowers, who are often unsure about how local investors will receive them.
CPI Property Group is a good case in point. In late 2018, it became the first non-financial issuer to make use of the Tokyo Pro-Bond market when it launched its debut issue of yen-denominated debt.
The company, which owns real estate in the Czech Republic and Germany, was able to raise ¥12bn through a placement of three and 10 year notes in December.
Ground-breaking
The firm was not looking to raise large sums of money in Japan, but it had nonetheless found a plausible way of diversifying its funding sources.
“Having a really unique and dedicated separate pool of capital that we can go to for modest size deals is really attractive,” says David Greenbaum, chief financial officer at CPI Property Holdings in Luxembourg. “The euro market is our core market: if we need to issue €500m or more, that’s where we’ll be going. But for smaller transaction sizes we would really like to be a regular issuer in Japan.”
In this respect, Greenbaum describes the Pro-Bond market as having been a “no-brainer”.
Setting up an issuance programme for Samurai bonds is famously complicated and expensive. There a mountain of legal documentation that has to be completed in Japanese, and issuers also have to commit to translating all of their financial results into the local language.
But borrowers can simply use their euro medium term note (EMTN) programmes when selling a Pro-Bond. They only have to complete a short form in Japanese to ensure that they can list their deals on the Tokyo Stock Exchange.
It was this simplicity and ease of access that also appealed to Intesa Sanpaolo, which has completed two Pro-Bond sales in Japan in the last two years, for a total of ¥59.8bn.
“The Samurai market is the most liquid and the most prestigious in Japan,” says Alessandro Lolli, head of group treasury and finance at Intesa Sanpaolo in Milan.
“But given that we are a newcomer and investors are not yet willing to buy huge deals from us, the Samurai market is pretty much off the table. It would be too expensive and too complicated to set up a programme.”
But it’s not only newcomers that have been experimenting, even well-established issuers have started to look at alternative routes into the yen market.
Sales of Euroyen deals have shot up over the last couple of years, for example, supplementing the usual run of Samurai bond issuance.
Euroyen deals are very similar to Pro-Bonds: they mean that borrowers can launch new deals very quickly and cheaply, without setting up a new issuance programme and without having to translate vast swathes of documents into Japanese.
This format has proven particularly attractive for foreign banks, many of which have had good reason to want to access the yen market as quickly and efficiently as possible.
In June 2019 the Japanese Financial Services Agency raised the risk weighting that local bank treasury investors must apply to senior bonds that count as total loss-absorbing capacity — an international measure of a bank’s financial strength.
TLAC issuers getting in with new sales before the June deadline would therefore be better able to attract investment from Japanese bank treasury teams, who would still be using the old risk weight system.
This was a big driving factor behind a surge in Euroyen issuance in 2018 and early 2019, from the likes of BNP Paribas, Crédit Agricole, Goldman Sachs and Société Générale.
“Some issuers have gone for Pro-Bonds or Euroyen deals based on considerations around timing,” explains Shun Machiyama, a vice president in the capital markets department at Nomura in Tokyo.
“You have a lot more flexibility in terms of going out and marketing new transactions in either of these formats. So if the conditions look good, you can gain access to the Japanese market very quickly.”
Borrowers from overseas raised a whopping ¥2.94tr from 114 deals in yen in 2018, making it their busiest year for issuance in the currency since the financial crisis.
With the market on course for another big year in 2019 — deal volumes had already hit ¥2.18tr by the start of September — the value of being able to access yen liquidity quickly is unlikely to diminish any time soon.
This is something that was recognised by France’s Groupe BPCE when it raised ¥62.1bn with a Euroyen offering earlier this year, ditching the Samurai bond format for the first time since December 2012.
The deal came after the JFSA raised risk weights on TLAC senior debt in June, but Roland Charbonnel, director of group funding and investor relations at BPCE, says that it was still the “flexibility you can get in term of timing” that most attracted him to the Euroyen product.
“We wanted that flexibility because we were trying to avoid competing supply, which can affect the spread level and the size you are able to achieve in the market,” he explains.
Charbonnel found that switching to Euroyen had little impact on the outcome of the transaction.
“We only lost a small amount of demand because of the choice of format,” he says. “Whenever we consider doing a public issue in the Japanese yen market, we will either do a Samurai bond or a Euroyen deal.”
BPCE is unlikely to be the only international issuer that is now weighing up its options for how to approach the bond market in Japan.
If there is one thing that the recent boom in issuance of Euroyen deals and Tokyo Pro-Bonds has proven, it is that investors are more than willing to buy these kinds of deals as they broaden their hunt for yield.
Nearly 70% of all of the Euroyen and Pro-Bond issuance of the last five years has arrived in the last 20 months, as the products have rapidly begun to establish themselves as alternative to Samurai deals.
The wheels of change move slowly in Japanese capital markets. But there have been some very clear signs of evolution in recent years.
The Tokyo Stock Exchange’s claim that Pro-Bonds could end up becoming “a central bond market for the Asian region” may have seemed too punchy back in 2010.
Increasingly, however, it is easy to see how Pro-Bonds and Euroyen deals could come to play an essential role in the development of the Japanese yen market internationally.