In a virtual roundtable Jo Thornhill and Harry Wallop put questions to issuers about funding strategies and changing conditions in the Japanese Euro-MTN market. Q. How did the crisis in Asia affect issuance in Japan off your Euro-MTN facility in 1998? Motokawa: "Many Japanese companies were downgraded by the US agencies last year. And Toshiba Corporation was no exception. Having the ratings downgrade made issuance very difficult for Toshiba in 1998. But we were helped by the fact that the Japanese investors knew our name and our activity was good. Although, we had to supply lots of information. European investors were much more cautious of our credit. Because of the problems Japanese banks experienced last year Japanese companies had to pay a premium to raise funds in the Euro-MTN market, for example we paid plus 50 basis points, which was a severe increase." Shimoyama: "Many Japanese issuers found it more expensive to raise funds off their MTN programmes. During the crisis we decided to limit new issues to avoid such costs. That is why we were able to minimize the effect of the crisis on our funding costs while the total amount issued off the programme obviously decreased during that period." Akerlind: "Strangely, the volume coming from Japan has been big, both this year and last. However, the investor base was different. Demand from the retail sector was lower in 1998. Though recently we have seen this turning again. The number of regional institutional investors buying structured products increased last year." McDougall: "I agree there were definitely less retail investors in the market. Abbey has not issued off its Japanese retail programme for some time now. And there was definitely less cash in the market. The fall-off could have been greater but people started to become credit conscious and investors appeared to be comfortable with Abbey's name so we escaped reasonably lightly. This year, we are raising funds in Japan at the same level as last year but we have seen a drop-off in volume. We are probably down to 70last year's volume." Ro: "Our Eurobond was due for refinancing in March 1999 and so we set up the Euro-MTN programme to replace this. The Euro-MTN was much more convenient and flexible than our domestic Eurobond, which was not really cost effective when issue size is small." A. How much of your funding is achieved in Japan? Akerlind: "In 1998, 55% of our total issuance was into Japan. In 1999 this will increase to around 75%. Confidence is definitely growing again, particularly the volume from the retail sector. There is more demand now and for a wider range of structures." Ro: "All our notes so far have been bought by Japanese investors. As a single-A rated issuer, European investors are cautious about taking our paper. It is much easier for us to sell into Japan at the moment." Shimoyama: "Almost all our paper is sold to Japanese investors. However, both this year and last year some European investors bought Mitsubishi Euro-MTNs. Before the crisis we were planning to issue more and more into Europe but we had to postpone that. However, from now on we will be planning to increase issuance into Europe." McDougall: "It's 50%. But we only use the programme for small private placements. We try not to chew up the programme by issuing standalone bonds off it." Q. Is investor confidence in Japan growing in 1999? McDougall: "I think so. It has definitely got busier as the year has gone on. And July and August have been very good for us." Motokawa: "The injection of cash from public funds from the Japanese government has aided the improvement of the situation. I think last year was rock bottom for the Japanese economy, but now we will see recovery." Ro: "The Euro-MTN market is a convenient and efficient, well-developed market already but I am sure it is set to grow going forward. Investor confidence in Japan is certainly growing again." Shimoyama: "In the short-term investor confidence is growing. But one never knows what will happen by the end of the year. You do not know what the catalyst is that could set off another crisis. The situation is like a coin with opportunity and panic on different sides. Which way will it turn? So I think confidence could decrease in the long-term, but I doubt as seriously as it did during the crisis." Q. How have structures and maturities that Japanese investors look at changed over the last few years? Akerlind: "We've seen an increase in equity-linked, Nikkei knock-in structures and inverse convertibles. But by far the most active is the burmudan callable powered reverse dual currency structure. With this note small institutional investors have an opportunity to take risk and achieve a good coupon, and get 100% redemption when the note is called." Ro: "We do not have high financing needs this year. The notes Fuji Xerox has issued have all been yen-denominated and of a simple structure." Motokawa: "Issuance is getting much more complicated, we are seeing increasingly structured trades such as index-linked notes and other options. It is cheaper to do structured trades and Toshiba always has a swap contract anyway. Japanese interest rates are very low so investors expect that in the long-term they must rise again. At the moment 10-year callable options are really popular. However, we prefer shorter maturities in the one- to five-year category." McDougall: "I don't think they have changed much. Investors have backed off from foreign exchange risk a bit recently, and are perhaps a little more conservative than before. Callables are particularly popular at the moment." Q. Have you been encouraged to look at more complex structures since interest rates in Japan are so low? Akerlind: "In the structured market we still aren't seeing many domestic Japanese borrowers. Non-Japanese issuers are more likely to do the structured trades. Japanese issuers are hesitant about the swap exposure and in order to execute these trades you have to have the knowledge and expertise as well as flexibility. They don't have the history of structured issuance. Ro: "We don't care what final form of note investors take, but our preference as an issuer is a simple type. We don't look for complicated structures." McDougall: "We've never had a problem with structures as long as they are legal and do not upset either the rating agencies or our investor base." Q. Do you think competition is increasing among borrowers in the Japanese Euro-MTN market? Akerlind: "We see more competition in Japan now than we used to. There are more issuers, both Japanese and non-Japanese looking for investors there. But SEK has been issuing into Japan for over 20 years. We have established a name and good reputation there and have the relationships in place." Ro: "As most of our investors are Japanese it hasn't been a great problem. But if we wanted to find European investors the competition would be much stronger between Japanese and non-Japanese issuers. Because currently European investors are less confident about investing in Asian companies, including Japanese. Fuji Xerox's credit rating would need to be higher and market conditions would have to be more favourable before these investors would probably buy our paper." Q. Do you think foreign borrowers are becoming more successful at attracting Japanese investors? Shimoyama: "It depends how you define successful. Now spreads are tight in Japan foreign issuers can seem generous in the coupons they offer to investors." McDougall: "Not really. We all lost out in Japan to a certain extent when during the crisis Japanese issuers' levels were very wide." Q. What have been the lasting effects of the economic crisis for the Japanese market? Motokawa: "Last year it was difficult for Toshiba to find investors. In 1999, so far, I think it has been an issuer driven market. Japanese investors have the cash, especially after the government injection of funds, but the sentiment among Japanese companies is weak, we are more cautious and watchful with our funding since the crisis." Akerlind: "It's a matter of credit worthiness. If an investor is buying a particular structure and is nervous about the risk it will want an issuer with a good credit rating. Many Japanese borrowers have had their ratings downgraded, so investors have been wary of buying structured paper from them." Shimoyama: "Last year's crisis had a huge impact. But I think the economy has reached rock bottom and is starting to recover. Japanese corporates need to restructure more and more. The mergers that are starting in the banking sector are a good thing for the Japanese macro-economy. Other sectors should follow the lead banks have taken in restructuring." McDougall: "The biggest and largest effect is that there is now more credit awareness, but that applies globally. Investors want to develop portfolios with a wide range of credits from around the world. At the end of the day, you have to look after your investors by educating them."
August 04, 2000
