Japan Bank Hiring in New York as Negative-Yield Funding on Offer

  • May hire 10 more bankers, boost dollar bond specialists
  • U.S. currency debt underwriting by top 3 Japan lenders surges

Top-rated Japanese issuers can get paid to borrow funds in the U.S. after currency swaps are used, adding to the business Sumitomo Mitsui Financial Group Inc. is chasing by hiring in New York.

SMBC Nikko Securities Inc., the investment banking arm of Japan’s second-largest lender, may hire 10 more bond bankers in New York, Shunshi Kira, the head of the capital markets division at the Tokyo-based company, said in an interview Monday, without giving an exact time span. The securities company also wants to add specialist staff in Japan who can advise top-rated issuers on dollar offerings.

‘‘Highly-rated Japanese issuers can effectively borrow at minus rates if they swap dollars back to yen,” according to Kira. “A week’s sales in the U.S. corporate bond market can equal an entire year’s in Japan. So if you can get into the Top 5 or 10 that’s huge, and even for the best 15, 20 managers, there’s quite a large fee share and a lot of revenue.”

Sumitomo Mitsui, Mitsubishi UFJ Financial Group Inc. and Mizuho Financial Group Inc., Japan’s three biggest lenders, managed more than $37 billion in investment-grade dollar bonds so far in the first half, 10 times more than what they did only five years ago, including offerings by Japanese issuers. They are also leveraging their huge balance sheets to get a piece of the refinancing of global M&A deals in bond markets after providing initial acquisition funding, such as with Anheuser-Busch InBev NV’s purchase of SABMiller Plc announced last year.

SMBC Nikko and the brokerages of Japan’s two other so-called megabanks Mizuho and MUFG managed Central Nippon Expressway Co.’s U.S. dollar bond sale in May, including a $500 million five-year note paying a coupon of 2.362 percent. The security currently trades at a yield of about minus 0.22 percent, if swapped to yen, according to calculations by Bloomberg.

Other high-rated Japanese issuers that frequently sell U.S. currency debt may be able to fund at minus rates on a swap basis, including the Tokyo Metropolitan government, East Nippon Expressway Co., and Japan Finance Organization for Municipalities, according to calculations based on the yields of their past issues.

Japan Finance Organization for Municipalities, which is owned by and lends to local governments, can raise funds in dollars that when swapped back into yen offer a funding rate of close to zero or less, depending on market conditions, according to the firm. U.S. currency funding offers investors diversification and competitive costs compared with the yen, and JFM plans to continue to do benchmark-size dollar bond deals on a regular basis.

 
JFM sold $1.5 billion in dollar debt in April at a coupon of 2.125 percent.

Climbing Ranks

Mizuho is the largest Japanese underwriter of dollar debt, managing more than $30 billion in investment-grade debt last year, ranking it 13th. Sumitomo Mitsui was 23rd at $6.7 billion, and is 19th this year, according to data compiled by Bloomberg.

Kira said he expects sales in the Japanese corporate bond market to climb this fiscal year as the Bank of Japan’s negative-rate policy sends benchmark yields to minus levels and debt market funding rates become more competitive to bank loans. Issuance declined 20 percent to about 7 trillion yen in fiscal 2015.

Capital spending by Japanese companies increased 4.2 percent from a year earlier in the first three months of 2016, marking the 11th straight quarter of gains, government data released Wednesday showed.

“Banks can’t charge minus rates on loans so the advantage they had is disappearing,” said Kira. “If yen bond market issuance goes against my expectations, it will probably be because of large dollar-bond sales taking from the market. That’s the risk.”

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