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Japan Tobacco Sells Bonds After Record Tax Increase

Japan Tobacco Said to Sell Bonds Today at Lower Yield
The maker of Mild Seven and Winston brand cigarettes told investors it will price five-year notes to yield 10 basis points more than government debt. Photographer: Tomohiro Ohsumi/Bloomberg

Japan Tobacco Inc. raised 80 billion yen ($955 million) from bonds at a lower relative yield than it paid before a record increase in domestic tobacco taxes.

The sale by the maker of Mild Seven and Winston brand cigarettes included 40 billion yen of five-year, 0.533 percent notes priced to yield 10 basis points more than similar-maturity government debt, according to data compiled by Bloomberg. The Tokyo-based company paid a 24 basis-point spread on similar-maturity 1.128 percent bonds in May 2009, the data show.

Japan, the world’s fourth-biggest cigarette market, raised tobacco duty 40 percent in October to discourage smoking and raise money. Japan Tobacco, which controls 65 percent of its home market, acquired U.K.-based Gallaher Group in 2007 and Japanese frozen-food producer TableMark Co. in 2008, helping reduce its dependence on a shrinking domestic cigarette market to 31.1 percent of net sales as of March 31 from 44.7 percent three years earlier, according to a company statement.

“Japan Tobacco knew this would come so they’ve diversified their business,” said Nobuto Yamazaki, a fund manager who helps oversee 1 trillion yen at DIAM Asset Management Co. in Tokyo, who smokes 20 Mild Seven a day and who doesn’t own the company’s bonds. “I don’t think the non-smoking trend will ruin them.”

The extra yield investors demand to own Japanese corporate bonds instead of similar-maturity government debt fell to 28 basis points as of yesterday from 38 basis points on Jan. 4, according to an index compiled by Nomura Securities Co.

Narrowing Spreads

The spread on Japan Tobacco’s 100 billion yen in 1.128 percent bonds due 2014 narrowed to 14 basis points yesterday from 24 basis points at the start of the year, according to Japan Securities Dealers Association prices.

“We think the deal will contribute to improve the stability of our financial situation,” Japan Tobacco spokeswoman Mahoko Tsuchiya said in a phone interview today. “Interest rates are low now so the timing is appropriate.”

Japan Tobacco’s revenue rose 8 percent to 3.3 trillion yen in the six months ended September while operating profit increased 22 percent, according to its regulatory filings. The company expanded market share in countries including Russia, Turkey and Italy even as domestic sales declined and the strong yen cut profitability, it said.

Moody’s Investors Service said on April 29 that Japan Tobacco’s investment-grade Aa3 rating won’t be affected by the tax increase, citing its “growing overseas operations.”

Japan Tobacco’s sale today also included 20 billion yen of seven-year, 0.841 percent bonds and the same amount of 10-year, 1.3 percent notes, all priced at a 10 basis-point spread, according to Bloomberg data.

Nomura Securities, Mizuho Securities Co. and Mitsubishi UFJ Morgan Stanley Securities Co. arranged the transaction.

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