business

Japan Inc. Flops Become Bond Market Stars Amid Yield Hunt

Updated on
  • Olympus, JAL and Tepco bonds draw demand despite past trouble
  • Investors may be underestimating risks: Sumitomo Mitsui Asset

Japan’s yield-hungry investors are helping turn companies that were once bond-market pariahs into stars.

Olympus Corp., the medical equipment maker that came under fire six years ago for a cover-up of losses, this month sold its first bond to the public since 1996, to strong investor demand. Tokyo Electric Power Co. Holdings Inc. issued its first 10-year notes since before the Fukushima nuclear crisis. Debt of Japan Airlines Co., which emerged from bankruptcy in 2011, now outperforms bonds of domestic rival ANA Holdings Inc.

It’s not just higher yields that are attracting investors, according to Mizuho Securities Co. chief credit strategist Hidetoshi Ohashi. Olympus, for example, owns competitive technologies, while JAL has cut unprofitable businesses, and Tepco has government support, he said. But some investors such as Jun Fukashiro at Sumitomo Mitsui Asset Management say that generally speaking bond buyers may be underestimating risks in their hunt for yield.

Japan’s low interest rates and investors’ increased risk tolerance are clearly helping “those who should otherwise be unable to issue bonds to do so, or sell notes with maturities that they should otherwise be unable to,” Fukashiro said.

Companies used to struggle to return to the debt market once they were shunned by Japan’s generally cautious investors, but the bar seems to have come down because of low bond yields, according to Hiroaki Hayashi, director at Fukokushinrai Life Insurance Co.

The concern is that some investors may have stopped paying enough attention to corporate governance and other details, giving a second chance to the firms that don’t deserve it, he said.

“Overall, it’s a good thing that companies are returning’’ to the bond market, but “if market participants were in a let’s-just-buy-whatever-we-can kind of mood, as in the U.S.’s high-yield market, that would be no good,’’ Hayashi said.

Negative Rates

A Nomura Holdings Inc. index measuring Japanese corporate bond yield premiums was last at 29 basis points, near the lowest since January 2016. The Bank of Japan’s monetary stimulus steps have pushed down yields on sovereign bonds as long as seven years below zero.

“In terms of risks, people may be starting to invest in securities that have lower credit ratings and longer duration than those they used to buy,” said Yoshihiro Nakatani, a senior fund manager at Asahi Life Asset Management.

Olympus, which now has an A- grade from Rating & Investment Information, saw that score drop to BBB- in 2011, one level above junk. That year its then-chief executive officer, Michael Woodford, uncovered investment losses at the company that went undetected for more than a decade. It had to restate five years of past earnings.

Now, market sentiment has come back. Investor orders for the company’s notes came to 2.7 times the 10 billion yen ($89 million) sold earlier this month, according to underwriters who asked not to be identified because the information was private.

Medical Business

The company’s strong earnings have reassured investors. Its endoscopes have about a 70 percent global market share, and it’s a “very competitive” business, said Yuta Ishinoda, a senior analyst at R&I. Olympus’s net income in the quarter ended June 30 beat analyst estimates. While the firm has yet to resolve legal disputes about its past accounting and civil lawsuits in the U.S. about some of its equipment, it has a “financial base that can withstand sizable losses,” according to a R&I statement released in August.

“We have decided to issue bonds because our credit-rating improved to A- last year and because there is a favorable environment for us to raise funds, including interest rate conditions,” said Shinichiro Murakami, an Olympus spokesman.

For Tepco’s 10-year bonds last month, orders also exceeded the amount on offer as high yields relative to other power utilities attracted investors, according to the underwriters.

While concern remains on how the company will manage 15.9 trillion yen in cleanup costs for the Fukushima plant, the government’s approval of its long-term business plan in May has eased such worries. The cost to insure the utility’s debt from nonpayment has dropped to 56 basis points from more than 1,700 in 2011, according to CMA data.

Tepco determines the details of issuance, including the maturity and amount, after consulting with underwriters and while considering market conditions, said Maki Murayama, a spokeswoman.

Tokyo-Hawaii

The turnaround for JAL, whose debtholders were only able to recoup 12.5 percent of their money after the airline filed for bankruptcy in 2010, is also stark.

The company restructured in the following years, cutting routes, workers and aircraft. Now JAL is reviving its network, starting new route this month including Narita near Tokyo to Kona, Hawaii, and has also ordered more jets.

“Its performance has stabilized, so there is no reason not to buy” its debt, Mizuho Securities’ Ohashi said.

JAL’s December 2026 bonds had a spread of about 38 basis points, less than the 47-basis-point extra yield for competitor ANA’s September 2026 notes, Bloomberg-compiled prices show.

Yusuke Yabumoto, a spokesman for JAL, declined to comment.

In the end, investors must weigh a company’s future prospects against risks that in many cases may have receded.

“The question is, which is more likely to lead to default -- reputation risk or weak business performance?" said Nakatani at Asahi Life Asset. "It’s the latter.”

For bond holders, an issuer’s trouble in the past should matter little if it doesn’t affect its ability to pay down its debt in the future, said Katsuyuki Tokushima, chief investment analyst at NLI Research Institute in Tokyo. If the spread is widening just because of what happened long ago, “that could rather be an opportunity” to buy the securities, he added.

(Adds NLI Research analyst comment in the final paragraph.)
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