Nomura Extends Binge in Busiest Junior Debt Market in Six Years

  • Mitsubishi Estate to debut 200 billion yen sale this month
  • Junior notes offer yields eight times the Japan bond average

Nomura Holdings Inc. and Mitsubishi Estate Co. are set to tap Japan’s busiest market for subordinated debt in six years, bolstering their balance sheets and offering investors some precious yield.

Mitsubishi Estate, Japan’s largest developer by market value, plans to price about 200 billion yen ($1.7 billion) of the notes this month, while Nomura and Mitsui Sumitomo Insurance Co.have also announced sales in the last month. Japanese companies last year issued about 2.3 trillion yen of such debt that’s repaid after senior bonds, the most in six years, while the yield on Japan’s 10-year government notes touched 0.19 percent on Thursday, a record low.

“There is a lot of demand for these kind of issues because in the current market environment, investors basically can’t get yield,” said Toshiyasu Ohashi, the chief credit analyst at Daiwa Securities Group Inc. “It’s a great time for issuers to sell capital-type bonds right now with base rates as low as they are.”

Investors are ready to look beyond the risks associated with reduced repayment rights in their hunt for yield, allowing finance companies to ramp up capital-counting debt sales to meet stricter requirements. Mitsubishi Estate is debuting 60-year subordinated notes in its biggest sale in more than 15 years and its first since 2014 as it locks in long-term funds without tapping shareholders, according to Bloomberg-compiled data.

High Demand

“With the low interest rate environment becoming prolonged, and the creditworthiness of issuers strong, there’s a lot of investor demand for issues promising 2 percent to 3 percent in annual returns,” said Haruyasu Kato, the manager of Mizuho Trust & Banking Co.’s Credit Spread Strategy fund. The planned sales will help expand the investor base for subordinated debt, he said.

The details including issue date and coupon for Nomura’s planned sale of perpetual bonds have yet to be decided. Lenders Mitsubishi UFJ Financial Group Inc., Mizuho Financial Group Inc. and Sumitomo Mitsui Financial Group Inc. sold more than 900 billion yen of similar debt last year that paid interest of at least 2.49 percent.

Nomura’s planned issue will allow it to “further strengthen its financial position to meet potential regulatory requirements,” while maintaining flexibility in future capital policy, Japan’s largest brokerage said by e-mail. Mitsubishi Estate plans to use the funds from its sale to help with developments in Tokyo’s central business district of Marunouchi, said Chika Kanamori, a spokeswoman for the company based in Japan’s capital.

Some Wary

Even with yields more than eight times the average paid by Japanese bonds, some investors are wary of buying the debt right now. The average premium investors demand to hold Japanese corporate bonds was 28 basis points on Jan. 12, up four basis points from six months earlier, Bank of America Merrill Lynch data show.

‘‘Subordinated bonds offer a precious investment opportunity to obtain yield, but they are more sensitive than senior bonds to widening spread movements,” said Yoshihiro Nakatani, a senior fund manager at Asahi Life Asset Management. “Credit spreads are in general too tight now, and I think we have to pay more attention to widening premium risks, so now is not the time for buying” subordinated bonds, he said.

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