Hedge Funds Targeted by Mizuho for Unwanted Junk: Japan CreditFinbarr Flynn and Takako Taniguchi
Hedge funds are being targeted by Mizuho Financial Group Inc. as buyers of Japanese corporate bonds trading below face value, after a rally in riskier debt failed to revive distressed assets.
Mizuho hired Taketoshi Tsuchiya from Barclays Plc. to head a team that will target hedge funds, the first such foray for Japan’s second-largest underwriter of domestic bonds. The average yield premium for BBB rated Japanese corporate paper plunged 56 basis points in the past year to 40, down from as high as 273 in June 2011 after a record earthquake triggered a nuclear disaster, Bank of America Merrill Lynch data show.
The rally has failed to extend to some of the nation’s worst-hit securities. Tokyo Electric Power Co.’s 1.155 percent notes due 2020, its last debt offering before its Fukushima plant was wrecked by a tsunami, traded at 84.4 yen of the 100 yen face value. Japan’s biggest investors base their bond purchases primarily on the Nomura Bond Performance Index, which excludes notes with ratings below A, such as Sharp Corp. and Nippon Sheet Glass Co.
“It is a big deal for our clients having to hold on to bonds that they bought at 100 which are now trading under 90,” Yasuhiro Shibata, head of fixed income at Mizuho Securities Co. in Tokyo said in an interview. “In dealing with such bonds, one avenue there is to expand our global investor network.”
The latent market for under-par debt in Japan may total as much as 2 trillion yen ($19.5 billion), or 5 percent of all corporate notes, according to Tsuchiya. Japan offers investors access to the largest debt pool in Asia with legal structures that can be relied upon in case of bankruptcy and debt recovery, he said.
“In many cases, it is a lack of buyers that can cause a fall in bond prices rather than a significant deterioration in creditworthiness,” said Nobumasa Mizutani, the chief investment adviser at Japan Credit Advisory Co., a hedge-fund advising firm in Tokyo. “There is an opportunity to get really attractive returns” by distinguishing between the two, he said.
Bond issuance by Japanese companies rated below A by Standard & Poor’s or Moody’s Investors Service has doubled so far this year to 2.2 trillion yen, according to data compiled by Bloomberg. The notes, which include SoftBank Corp. and Sony Corp., accounted for 26 percent of local corporate sales, up from 13 percent last year.
Many Japanese investors have been saddled with bonds trading below par value after the meltdown at Tokyo Electric’s Fukushima Dai-Ichi plant imperiled the utility’s future. The cost to insure the debt of the world’s largest power company against nonpayment was at 366 yesterday, down from a high of 1,762 in October 2011, according to data from CMA. That’s still the second-most expensive in Japan after Sharp.
Tokyo Electric has 4.2 trillion yen in outstanding bonds including debentures maturing in 2040, which currently trade at 32 percent below face value, the biggest discount for any of the company’s notes, according to data compiled by Bloomberg. Tepco issued 4.5 trillion yen in debt in the decade to March 11, 2011, trailing only Japan’s two largest banks, Mitsubishi UFJ Financial Group Inc. and Sumitomo Financial Group Inc., according to Bloomberg data.
Nomura Holdings Inc. on Nov. 25 recommended investors buy Tokyo Electric’s debt, citing Prime Minister Shinzo Abe’s consistent opposition to any winding down of the company and the possibility it may return to full-year profit in the year ending March 31.
The debt of Sharp and Nippon Sheet Glass, which both had their credit ratings cut to non-investment grade last year by Japan’s Rating & Investment Information Inc., is also trading under par. Convertible bonds of Elpida Memory Inc., which filed for bankruptcy in February last year, traded at 15.4 yen to par yesterday.
Sharp is recovering from a record 376 billion yen loss in 2012 with the help of a lifeline from its main lenders that allowed the television maker to repay 200 billion yen of convertible bonds in September. The company’s default swaps fell to 545 yesterday from a high of 8,077 in October in 2012, according to upfront prices from CMA. Its 1.604 percent debt due in 2019 trades just under 80 yen to par.
“The pie is huge and with a tendency for distortions in price, there is a chance for investors,” said Tsuchiya, who previously served as chief credit analyst at Nomura. “In a market like the U.S., where there is such a high level of transparency, it is extremely difficult to generate extra yields.”
Corporate debt yields have tumbled since April 4, when the Bank of Japan doubled monthly Japanese government bond purchases to more than 7 trillion yen, and decided to boost holdings of corporate notes with BBB ratings or higher by 10 percent to 3.2 trillion yen by the end of 2013. Japan’s 10-year benchmark rate was little changed at 0.66 percent today. The yen weakened 0.2 percent to 102.65 against the dollar as of 3:45 p.m. in Tokyo.
Mizuho has hired two new employees in Hong Kong and plans more hires in the U.S. and Europe for the team, which will work as part of the company’s credit trading group, according to Shibata.
“For a long time, I’ve bemoaned the fact that the issuer base in Japan’s debt market isn’t expanding,” Toshiyasu Ohashi, the chief credit analyst at Daiwa Securities Group Inc., wrote in a report dated Dec. 10. “More effort is needed to encourage the sale of bonds with mid-to-lower ratings to reinvigorate the local corporate bond market.”