Up until the end of the 2011-12 fiscal year, Australian banks were among the most prolific issuers in the Samurai market. Australian issuers accounted for 30% of total issuance in 2008, 29% in 2009, 16% in 2010, 22% in 2011 and 15% by December 2012. Given that this volume was accounted for by a quartet of issuers, it made each of the big four Australian banks big issuers.
This flow came to a crunching halt in March 2012, when Westpac launched a ¥114bn five year transaction. This Westpac issue, which followed trades of ¥83.5bn and ¥85bn for NAB and ANZ, was a very well received transaction which would have been considerably larger had the issuer not chosen to cap the size of the fixed rate tranche at ¥100bn. It was, however, the last issue from an Australian borrower in the Samurai market in calendar 2012, and by early June there had been no Australian issuance in 2013.
At SMBC Nikko in Sydney, executive director Nick Palaskas says the hiatus in Samurai issuance among Australian banks is easily explained, and is the result of three factors. “The first reason why the public market has been quiet is the yen/US dollar basis swap, which currently makes it very expensive for issuers to swap the proceeds back into US dollars,” he says.
According to Luke Spitty, vice president at SMBC Nikko in Sydney, with the five year yen basis swap at about minus 60bp, the after-swap costs of funding in the public yen market are some 40bp higher than those that Australian banks could achieve in US dollars.
“The second reason why there has been no Australian issuance in the Samurai market recently is that we are now approaching the floor, in terms of spread, at which Japanese investors are prepared to buy foreign credits,” says Palaskas. “There is little scope to go much further because in some cases spreads are now approaching or even pricing through domestic Japanese levels.”
A third explanation for the dearth of Samurai activity by Australian banks, says Palaskas, is that their requirement for funding has fallen substantially over the last 12-18 months, for a number of reasons. “There has been very little asset growth at the banks, and post global financial crisis we have seen deposits grow and remain relatively sticky,” says Palaskas. “So their balance sheets are fairly static. They have also been unwinding some of their liquidity books and freeing up cash.”
Spoilt for choice
When they have needed external funding, Australian banks have been spoilt for choice in several markets. As Palaskas says, the covered bond and RMBS markets have continued to be highly competitive sources of funding, and when they have chosen to issue in the international public market, a number of options have been considerably cheaper than yen. NAB has issued recently in Swiss francs, CBA has completed an opportunistic euro trade, and there have been a handful of large short-dated US dollar issues from Australian banks.
None of this, however, is to suggest that the Japanese investor base has lost its relevance for Australian borrowers. “We are in a slightly different environment now, when optimising funding costs is more important than just issuing large volumes of debt,” says Palaskas. “The Japanese market has historically been very good for borrowers looking to average down their cost of funding via more esoteric options such as private placements, structured MTNs and Uridashis.”
MTNs and Uridashis
The result is that Australian borrowers, predominantly from the FIG space, remain very active in the Japanese market, with Palaskas saying that SMBC Nikko’s Sydney office has been doing at least one or two Japan-targeted deals a week for Australian clients this year. “For example, one of the major Australian banks has been doing several structured MTN trades each week in tickets of between ¥100m-¥300m, almost all of which has been sold into Japan,” he says.
Spitty says the Uridashi market also continues to be a vibrant source of opportunistic funding for Australian banks, chiefly in vanilla format, although structured opportunities are arising, and in a range of currencies. “As well as issuance in US, Australian and Kiwi dollars, borrowers have been branching out into a wider range of exotic currencies,” he says. “Brazilian real and South African rand were both popular last year, and this year we have seen an increase in issuance in Turkish lira and Mexican peso.”
By late May, Spitty adds, Australian banks had issued 15 Uridashi tranches raising around $880m, versus a total of 19 tranches in 2012 worth $1.26bn, which suggests that volumes for 2013 should surpass last year’s.
Although there is no shortage of demand among Japanese institutions for Australian credits, Spitty says as long as the basis swap keeps funding costs prohibitively high, issuance volumes from the big four Australian banks in the Samurai market are likely to remain depressed. However, he says that there are other candidates from Australasia for issuance into the Japanese institutional market.
“We may see some issuance from other borrowers in the semi-public Euroyen format,” Spitty says. “There is some investor interest in the New Zealand subsidiaries of the Australian banks, which tend to issue up to 20bp-30bp behind their parent banks. In this low yield environment, some investors who have not looked at New Zealand borrowers in the past may be more open to issuance from Kiwi or second tier Australian banks. Although their funding needs are fairly low at the moment, they may be candidates for issuance in the future.”
Koh Kawana, managing director and co-head of debt syndicate at SMBC Nikko in Tokyo, shares the view that there will continue to be a wide range of opportunities for Japanese banks’ debt capital market franchises in Australia beyond arranging Samurai issues for the big four banks.
“The big four banks are not issuing at the moment but there is still very strong demand among Japanese investors for exposure to Australian credits,” he says. “So we’re looking at what we can do for other issuers such as corporates and financials other than the big four banks, not necessarily in the public market but in private placement format.”