Junk-Rated Indonesia Sells Yield-Hungry Japan Banks Debt at 0.8%

  • Indonesia’s 0.83% coupon compares with Toyota’s 0.001% rate
  • ‘Banks have no choice,’ need to pursue returns: Moody’s

Indonesia, which this month failed to convince S&P Global Ratings it wasn’t junk rated, found it easier to sell Japanese banks its debt with yields well below 1 percent.

Japanese lenders bought more than half of five-year notes when Indonesia sold 100 billion yen ($954 million) in Samurai bonds on Wednesday in a deal that included three-year debt paying a coupon of 0.83 percent. That compares with the 0.001 percent in interest investors paid to buy bonds from Honda Motor Co. and Toyota Motor Corp. units this month.

Three of Japan’s four biggest banks, including Mitsubishi UFJ Financial Group Inc., are forecasting smaller profits this year as the Bank of Japan’s negative-rate policy pushes down loan margins, forcing lenders to take greater risks at home and abroad. Samurai issuance hasn’t been able to satisfy the increased demand for yield, rising just 1.4 percent to 546 billion yen in the fiscal year started April, as the cost to swap yen proceeds into home currencies has soared.

“Sacrificing credit quality for yield is natural,” said Hiroaki Fujioka, a senior credit analyst at Daiwa Securities Group Inc. in Tokyo. “That trend is strengthening.”

Interest rates below zero in Japan are generating demand for riskier issues that offer extra spreads. There were at least eight Samurai borrowers last year with an AA equivalent score from Moody’s Investors Service or S&P Global Ratings, while there has been only one since the BOJ’s adoption of negative rates in January.

Issuers are interested in diversifying their funding markets and currencies, and that probably helped a resurgence in sales since May, according to Daiwa’s Fujioka. Japanese banks have been slashing their holdings of local sovereign notes and are under pressure to find yield as the best-rated companies access markets for next to nothing.

“Japanese banks can’t lend to large corporates at 0.001 percent unless there are other sources of revenue,” said Graeme Knowd, a managing director at Moody’s in Tokyo. “Banks have no choice, they do need to make a certain amount of returns.”

Samurai sales have rebounded since May even though the premium for yen holders to borrow dollars for five years has climbed to 91 basis points from 67 a year earlier.

For more on overseas issuers selling yen debt, click here.

Indonesia, which sold euro-denominated bonds this month too, is rated junk by S&P, while Moody’s grades it one level higher at its lowest investment peg. The sovereign’s sale is the fourth at 100 billion yen or more in the last month, the biggest being Mexico’s 135 billion yen deal. Credit Agricole SA and Societe Generale SA have also sold 10-year subordinated Samurai notes in the last month paying 1.78 percent or more.

For Japanese banks, while investing in Indonesian bonds is certainly more profitable than lending to large domestic corporates, providing funds to lower-rated local companies is an alternative if priced appropriately, according to Moody’s Knowd.

“The dilemma in Japan is, can you charge enough,” said Knowd. “If you charge the appropriate rate to cover the credit risks, are there actually willing borrowers?”

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