Nomura Risk Decline Outpaces Goldman on Rescue Law: Japan Credit

Nomura Holdings Inc.’s bond risk fell to a three-year low, outpacing a decline for Goldman Sachs Group Inc., after a new law allowed for government bailouts of Japanese securities companies.

The cost to insure Nomura’s debt against non-payment slid 217 basis points in the past year to 118 this week, the least since Oct. 12, 2010, according to data provider CMA. The drop outpaced a 130 basis point retreat in the Markit iTraxx Japan index and was almost four times greater than the 57 slump for Goldman to 126.

Fitch Ratings Ltd. raised Nomura’s debt rating two levels to A- on Sept. 25, saying the company has a greater chance of rescue during a crisis because it is “systemically important.” Japan passed legislation in June that made brokerages eligible for capital from the state-run deposit insurance agency. Nomura earnings have also been boosted by Prime Minister Shinzo Abe’s stimulus policies.

“The impact of the Deposit Insurance Law revision in June on Nomura’s creditworthiness has taken some time to filter in, with overseas investors now getting a grasp of its full implications,” said Yusuke Ueda, a Tokyo-based research analyst at Bank of America’s Merrill Lynch unit. “Another reason for the risk decline is the boost from Abenomics for the company’s domestic earnings base.”

Stock Rally

Nomura’s net income soared to 65.9 billion yen ($677 million) in the quarter ended June 30, from 1.9 billion yen a year earlier, as the country’s stock market rally spurred brokerage commissions and fees from managing share sales, it said in a statement on July 26. The Tokyo-based company managed Suntory Beverage & Food Ltd.’s global initial public offering quarter this year that raised almost $4 billion.

The Topix index of Japanese stocks rose 58 percent in the past year to 1,161.52 as of 9:41 a.m. today and reached the highest level since 2008 on May 22. An average of 3.4 billion shares were traded each day on the Tokyo Stock Exchange’s first section in the first nine months, up from 1.8 billion a year earlier, data compiled by Bloomberg show.

Nomura’s fortunes revived since Chief Executive Officer Kenichi Watanabe was replaced by Koji Nagai in August following an insider trading scandal that led some debt issuers to drop the company from planned sales. The Financial Services Agency ordered Nomura to improve its operations in August last year, concluding an investigation that revealed the company failed to prevent employees from providing tips to traders.

Beating Goldman

“We remain committed to winning the trust of the rating agencies,” said Kenji Yamashita, a spokesman at Nomura. “We will continue to build trust with our stakeholders by delivering sustained profitability and maintaining our strong financial position.”

The cost of insuring Nomura’s bonds was 153 points higher than Goldman’s contracts a year ago, according to CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the private market. The Japanese company’s default-swaps fell below those of its U.S. peer two days after Fitch’s upgrade and have stayed lower since.

The credit-default swaps of Daiwa Securities Group Inc., Japan’s second-largest brokerage, plunged 156 basis points in the past year to 132.5 yesterday, CMA data show. Fitch kept the company’s rating unchanged at BBB+, one rank below Nomura, citing its “lower systemic importance,” according to the Sept. 25 statement.

“Nomura is an easy name for investors to focus on with some default-swap spread left relative to its improved earnings,” Junichi Shimizu, a Tokyo-based credit analyst at Deutsche Bank AG, said in a telephone interview. “Their default swaps still have room to tighten.”

Bond Returns

Elsewhere in Japan’s credit markets, Nippon Yusen KK and Tokyu Land Corp. registered to sell as much as 100 billion yen of securities each, while Hokkaido Gas Co. registered for a maximum 30 billion yen offering, according to separate filings with Japan’s Finance Ministry. Sumitomo Corp. plans to sell 10-year notes this month, Nomura said in a statement yesterday.

Japan’s corporate bonds have handed investors a 1.35 percent return in the past year, compared with a 2.22 percent gain for the nation’s sovereign notes, according to Bank of America Merrill Lynch index data. Company debt worldwide has climbed 0.65 percent.

The yen has declined about 12 percent against the dollar since Abe took office on Dec. 26 pledging unlimited monetary stimulus to achieve 2 percent inflation rate and spur economic growth. It traded at 97.28 yen as of 9:44 a.m. in Tokyo today.

Japan’s benchmark 10-year bond yield fell 0.5 basis point, or 0.005 percentage point, to 0.635 percent in Tokyo.

Law Revision

The Deposit Insurance Law allows for financial support to insurance providers, securities firms and other intermediaries and creates a legal framework for “government intervention in anticipation of serious disruption in the financial system,” Fitch said. The law is due to come into force by the end of March.

Nomura is seeking to strengthen its overseas business as more Japanese companies target acquisitions and fundraising opportunities overseas. The firm plans to send 30 junior bankers study abroad annually to boost language skills and international experience, according to a memo obtained by Bloomberg News.

The company’s shares more than doubled in the past year to Sept. 30 and closed 0.4 percent higher at 751 yen yesterday. The index of securities stocks led the gains on the Topix in the period, almost tripling to 468.11 from 165.96 a year earlier.

“There is still room for companies whose default-swaps exceed 100 to tighten further,” Deutsche Bank’s Shimizu said. “There are no obvious Japanese companies facing an urgent default risk.”

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