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Promise Sees Bond-Market Return as Yields Decline: Japan Credit

Nov. 9 (Bloomberg) -- Promise Co., the consumer-finance firm shut out of the bond market for a year after the government tightened regulations, may issue debt as its purchase by Sumitomo Mitsui Financial Group Inc. restores investor confidence.

“With strong backing from Sumitomo Mitsui, we don’t have concerns about financing anymore,” Yasuo Yamazaki, the general manager of Promise’s treasury department, said in an interview in Tokyo last month. “We are reviewing the potential of bond sales for a reborn Promise.”

Promise may consider debt sales to cut the firm’s dependence on bank loans after relative yields on the company’s 2014 bonds shrank to a record following a Sept. 30 announcement by Sumitomo Mitsui, Japan’s second-largest bank, that it would buy the shares in the lender it didn’t already own. Contracts to protect Promise debt from default fell 358 basis points this quarter and on Nov. 4 reached the cheapest level relative to global peers since at least May 2009, according to CMA.

Japan’s three largest consumer lenders Acom Co., Promise and Aiful Corp. have struggled after a 2006 law capped the interest they could charge consumers at 20 percent from as much as 29 percent and reduced the number of borrowers qualified to take consumer loans.

Net Losses

Tighter oversight cost the industry at least 1.6 trillion yen ($20 billion) in refunds for overcharged interest payments. Takefuji Corp., formerly the nation’s third-largest consumer lender, went bankrupt last fiscal year, while Acom, Promise and Aiful posted losses.

Credit-default swaps tied to Promise traded at 173 basis points on Nov. 7, and have fallen the most in Japan the past three months, according to CMA, which is owned by CME Group Inc. and compiles prices in the privately negotiated market. Contracts on Acom declined to 211 from 510 on Sept. 29.

Sumitomo Mitsui in September offered to pay as much as 88.8 billion yen to buy the Promise shares it doesn’t already own through a tender offer. The bank will also spend about 120 billion yen to buy new shares, bringing the total cost to about 200 billion yen. Sumitomo Mitsui now owns 21 percent of Promise.

“A reentry to the bond market could strengthen Promise’s bargaining power when negotiating with banks on loan terms,” said Yasuhiro Matsumoto, a Tokyo-based senior analyst at Moody’s Investors Service. “Promise should be able to start diversifying its financing and break its reliance on bank loans as early as the beginning of 2012.”

Yields Plunge

The yield on Promise’s 2.06 percent seven-year bond maturing in March 2014 has fallen to 2.299 percent, bringing it to within 216 basis points of the benchmark government bond of similar maturity. The gap is the smallest since the bond was sold, according to data compiled by Bloomberg.

Promise’s shares have climbed 66 percent this year, compared with a 15 percent drop in the benchmark Nikkei 225 Stock Average. The shares traded 0.1 percent higher at 777 yen on the Tokyo Stock Exchange as of 10:27 a.m. local time.

Elsewhere in credit markets, Goldman Sachs Group Inc. will sell 22.3 billion yen of five-year uridashi bonds, according to a filing yesterday with Japan’s finance ministry.

The benchmark 10-year government bond yield was little changed at 0.985 percent yesterday, the lowest in a month. U.S. 10-year Treasury yields fell 0.018 basis points to 2.019 percent as of 6 p.m. in Tokyo.

Corporate Spreads

The extra yield investors demand to hold corporate bonds instead of government debt was 82 basis points, after reaching 83 last month, the widest since February 2009, according to an index compiled by Nomura Securities.

The yen traded at to 78.03 against the dollar as of 6 p.m. yesterday in Tokyo and has risen 3.96 percent this year. The central bank spent about 8 trillion yen of its currency on Oct. 31 to weaken it from the strongest level since World War II, according to Barclays Bank Plc and Totan Research Co. The Bank of Japan will likely leave the extra money in the economy, a person familiar with the matter said on Nov. 2.

Promise last sold bonds in April 2010, when it issued 10 billion yen of five-year notes with a 3.5 percent coupon, Bloomberg data show. Acom has sold three debentures this year and five in 2010. The most recent was a 15 billion yen note maturing in two years that pays a coupon of 3.85 percent, the highest among Acom’s 18 issues outstanding.

The premium investors demand to hold Promise’s 3.5 percent bond due in April 2015 instead of Japanese government bonds narrowed to 265 basis points on Nov. 4, from 327 on Sept. 28, two days before Sumitomo Mitsui’s announcement.

Government Approval

After the announcement, Shozaburo Jimi, Japan’s Financial Services Minister, said he supported banks increasing ties with consumer lenders in a bid to create a “healthy” 10 trillion-yen consumer-finance industry.

Promise’s net interest margin, a gauge of loans’ profitability, shrank to 13.7 percent in the year ended March, the lowest since Bloomberg began compiling data in 1995. Acom’s slid to 15.5 percent, the lowest in at least 11 years, the data show.

Loans outstanding at Promise declined to 920 billion yen as of March 31, the lowest fiscal year-end balance since 1997, Bloomberg data show.

“Consumer-finance companies are faced with a tough road ahead as the maximum 20 percent interest rate set under the new regulation would hinder the companies’ efforts to expand lending,” said Matsumoto of Moody’s.

Promise is scheduled to announce earnings for the six months ended Sept. 30 on Nov. 14.

To contact the reporters on this story: Shigeru Sato in Tokyo at; Takako Taniguchi in Tokyo at

To contact the editor responsible for this story: Chitra Somayaji at

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