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Corporate Bond Sales Rebounding as Yields Attract Borrowers: Japan Credit

Sales of Japanese corporate bonds rebounded this quarter from the weakest first half in five years as concerns that the European debt crisis may stifle funding and the lowest yields since October lured borrowers.

Japanese companies offered 2.172 trillion yen ($28.4 billion) of bonds this quarter, up 18 percent from the three months ended June 30, after the slowest first six months since the second half of 2006, according to data compiled by Bloomberg. By comparison, sales of corporate Eurobonds plunged 50 percent to $253 billion. Yields on company debt offered in Japan, excluding power companies and banks, fell to 0.577 percent on Sept. 26, the lowest in 11 months, from a 2011 high of 0.827 percent on Feb. 16, according to Bank of America Merrill Lynch Japan Industrial Index data.

“There’s uncertainty over the global financial system, which may make funding more difficult in the future,” Takayuki Atake, chief credit analyst at SMBC Nikko Securities Inc., said in an interview yesterday. “Borrowers want to take advantage of the good market conditions now by bringing sales forward.”

Concerns the global economy will slump are mounting as the International Monetary Fund cut its forecast for global growth last week and predicted “severe” repercussions if Europe fails to contain its debt crisis or U.S. policy makers deadlock over fiscal plans. The Bank of Japan this month kept its key interest rate near zero as it tries to stoke growth and combat deflation that’s gripped the nation for more than a decade.

Relative Yields

Yields on corporate bonds in the U.S. rose eight basis points in the quarter to 3.95 percent on Sept. 28, according to Bank of America Merrill Lynch’s U.S. Corporate Master Index. In Europe, yields climbed 44 basis points to 4.49 percent, according to Merrill Lynch’s EMU Corporate Index.

Borrowers including Keihanshin Real Estate Co., an Osaka- based property manager, Valor Co., a Gifu-based chain store, and Mori Seiki Co., a Nagoya, Aichi-based machine tools maker, offered their first bonds this quarter, Bloomberg data show.

Keihanshin priced 7 billion yen of five-year, 0.97 percent bonds to yield 40 basis points more than the yen swap rate, while Valor paid a spread of 30 basis points for its similar- maturity 0.87 percent notes. Mori Seiki paid 19 basis points more than government bonds for its 15 billion yen sale of 0.545 percent debt, according to data compiled by Bloomberg.

JR East

East Japan Railway Co. (9020), the world’s largest publicly listed train operator by sales, was the biggest non-financial borrower in the quarter. It issued 100 billion yen through a 60 billion yen sale on July 8 and a 40 billion yen offering on Sept. 2, the data show.

“We understand the yields are hovering at a historically low level on global recession concerns and the Bank of Japan’s additional monetary easing,” JR East spokesman Satohiko Asakura said in an interview. “We sold those bonds considering both our funding needs and investors’ demand.”

The Bank of Japan last month enlarged by 50 percent its asset-purchase fund that buys government bonds, corporate debt and stock funds.

While the yield premiums corporate borrowers pay over benchmark government bonds are shrinking, a drop in JGB yields is also helping borrowers tap the market. Japan’s 10-year government bond yield was little changed at 1 percent as of 2:21 p.m. in Tokyo after this year’s low of 0.965 percent on Sept. 22, according to Japan Bond Trading Co. That compares with its five-year average of 1.395 percent.

Bank Deposits

Japan’s banks, which hold half of the nation’s corporate bonds, are helping push yields down after bank deposits exceeded loans by 163.3 trillion yen last month, according to the latest data compiled by the Bank of Japan. That followed a record 166.7 trillion yen in June, raising pressure on lenders to find places to invest the cash.

Sales of corporate bonds this year declined 12.5 percent to 6.085 trillion yen as no nuclear plant operators have tapped the market since the March 11 temblor and tsunami that crippled Tokyo Electric Power Co.’s Fukushima Dai-Ichi nuclear power plant, according to data compiled by Bloomberg.

Elsewhere in Japan’s credit markets, the Markit iTraxx Japan index climbed eight basis points to 210 as of 9:20 a.m. in Tokyo, Citigroup Inc. prices show. Contracts to insure Japanese government debt for five years increased 3.5 basis points to 142 basis points yesterday, CMA prices show.

Credit-default swap indexes are benchmarks for protecting bonds against default and traders use them to speculate on credit quality. A drop signals improving perceptions of creditworthiness, while an increase suggests the opposite. The contracts pay the buyer face value in exchange for the underlying securities if a borrower fails to meet its debt agreements.

Yen Strength

The yen traded at 76.51 per dollar as of 2:20 p.m. in Tokyo. The Japanese currency appreciated to a post-World War II high of 75.95 per dollar on Aug. 19, threatening to derail Japan’s export-led recovery.

The government-run Development Bank of Japan sold $1 billion of 1.625 percent bonds due 2016 yesterday. The notes were priced to yield 45 basis points more than the benchmark mid-swap rate, according to data compiled by Bloomberg.

Nissan Financial Services Co. hired Mitsubishi UFJ Morgan Stanley Securities Co., Citigroup Inc., Goldman Sachs Group Inc., and SMBC Nikko Securities Inc. for a sale of three-year and five-year bonds planned next month, according to a statement from Mitsubishi UFJ Morgan Stanley.

Sumitomo Rubber

Sumitomo Rubber Industries Ltd., an automobile and motorcycle tiremaker, plans to borrow $25 million by the end of this month from banks led by Bank of Tokyo-Mitsubishi UFJ Ltd., according to a person with direct knowledge of the matter.

The five-year loan will be priced at 30 basis points more than the three-month London interbank offered rate, said the person, who asked not to be identified because the information is private. The funds will be used for working capital, the person said.

Spreads on Japan’s corporate bonds will stay narrow for a while, according to Nobumasa Mizutani, the manager of Mizuho Trust Banking & Co.’s Credit Spread Strategy fund, Japan’s top- performing bond fund with 167 billion yen in assets.

“From the global point of view, bond spreads in Japan are tighter than in Europe, and there will be pressure to widen them,” Mizutani said in an interview from Tokyo yesterday. “There will be short of offerings going forward, and that will keep the spreads from widening.”

To contact the reporter on this story: Yusuke Miyazawa in Tokyo at ymiyazawa3@bloomberg.net

To contact the editor responsible for this story: Shelley Smith at ssmith118@bloomberg.net

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