Cracking The Japanese Market For Debt

U.S. companies race to sell red-hot "samurai" bonds

Hewlett-Packard is doing it in Japan. So are Walt Disney and PepsiCo. Ford Motor's finance unit did it, too. IBM's investment bankers even gave away $350,000 worth of department-store gift certificates when Big Blue joined in. Are all these U.S. blue chips cracking a new Japanese export market? In a way, yes. Except that they aren't selling computers, cars, or soft drinks. What these companies are selling is debt--lots of it.

With Japanese interest rates at historic lows, investors starved for high yields are buying record amounts of "samurai" bonds, the generic term for yen-denominated debt issued in Tokyo by U.S. and other foreign borrowers. The Bond Underwriters Association of Japan estimates that some $30 billion worth of samurais will be sold in the fiscal year ending next Mar. 31 (chart)--nearly double the amount sold in the previous 12 months and triple the average for fiscal 1993 and '94. Next year? "They will be even more popular," predicts Hiroshi Toda, global bond-market chief at Nomura Securities Co., which underwrites 40% of all samurai debt.

LOW PAYOUT. Why the mad dash? With the Tokyo stock market going nowhere and with government bonds yielding 3%, a samurai paying 5% or more is an irresistible treat for investors. It's also a great deal for issuers. IBM, for example, paid only 5.3% on a three-year, 50 billion-yen ($467 million) samurai issue in September. IBM won't disclose how much it cut its interest bill by selling samurais instead of a comparable bond issue in dollars. But banking sources figure that samurai borrowers can save 50 to 75 basis points, even after accounting for the cost of hedging or swapping their yen proceeds into dollars. "It's cheaper than what we could have done in the U.S.," says John P. Burkhard, treasurer of Ford Motor Credit Co., which did its own three-year samurai issue on Nov. 6, raising 50 billion yen at a yield of 5%.

The low yields that make samurais so alluring for issuers are likely to continue. Few see the Bank of Japan, which slashed Japan's discount rate to 0.5% last year, tightening credit until at least late 1997. And the Ministry of Finance, under international pressure to widen access to Japan's $10 trillion personal savings pool, wants to encourage an outflow of capital to keep the yen's 40%-plus devaluation intact.

The ministry has eased restrictions on domestic sales of Euroyen bonds--yen debt underwritten in the London bond market. The move will help foreign issuers sell $105 billion in Euroyen bonds this year, estimates economist Jesper Koll of J.P. Morgan Securities Asia Ltd., up from $90 billion in 1995. To promote the samurai market, meanwhile, the ministry abolished a requirement that borrowers have at least a BBB credit rating to sell debt. That encouraged the Mexican government and the National Bank of Romania to sell samurais this year with yields as high as 7%. They were quickly snapped up by individuals, who have bought 65% of all samurais offered this year. But some problems have started to surface.

DEFAULT? Over the summer, Mineralbank, a lender 50% owned by the Bulgarian government, could not come up with the cash to redeem some $45 million in samurais sold to institutions. Bulgaria is declining to make good on the debt. Mindful of the problem, the International Monetary Fund has cautioned investors to be wary of samurais from emerging markets.


Foreign exchange losses are another potential headache for investors. Many samurais are "dual currency" bonds that are sold in yen but repaid in dollars or other currencies at predetermined rates. IBM, for example, will pay interest on its bonds annually in yen. When the debt matures in 1999, investors will receive $9,165.90 for every 1 million yen in bonds they redeem. That translates to 109.10 yen to the dollar, a 4-yen bonus over the current exchange rate. If the dollar strengthens further, investors will make a windfall. But they will get socked if the greenback plunges back to the 79.75-yen record low it hit in 1995.

Fortunately for investors, neither Tokyo nor Washington is interested in another dollar rout right now. As long as Japanese interest rates remain at rock bottom, buyers will continue scrambling for samurais wearing the stars and stripes and a host of other colors.

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