DoCoMo and Nippon Steel deals break bond ice

The success of two large bond issuances by NTT DoCoMo and Nippon Steel last week in Japan helped stimulate the country’s corporate bond market, which had all but dried up after the collapse of US bank Lehman Brothers and increasing bankruptcies at home.

Corporate bond issues have been declining all year, down 15.6 per cent to $116.9bn this year according to Thomson Reuters data.

As in other markets, the collapse of Lehman and the subsequent banking turmoil prompted extreme risk aversion among Japanese institutional investors. The mood has also been hurt by a rise in domestic bankruptcies.

Bar an issue by Toyota Finance, some utilities and infrastructure companies, there has been a dearth of issues since mid-September.

There have been 31 listed-company bankruptcies this year, the highest number since the end of the second world war, with 23 in real estate and construction.

“One problem for the corporate bond market is a highly contracted risk appetite and many [institutional] investors haven’t recovered from previous damage, with exposure to Lehman, Kaupthing and also some domestic names such as real estate companies,” said Fumihito Gotoh, head of credit research in Japan at UBS.

“They are excessively cautious about credit risk. They can accept utilities or names such as DoCoMo or Nippon Steel but they are not 100 per cent sure about less creditworthy names.”

The severe declines in Japan’s equity markets makes it difficult to raise funds there.

Last week, NTT DoCoMo sold Y100bn of five-year and 10-year bonds with an AA rating from Standard & Poor’s. Nippon Steel raised Y45bn in four-year and 10-year bonds with a AA- rating from Japanese rating agency R&I.

“Before last week’s success, people doubted that a double A company could issue in size,” said Yasuro Ken Koizumi, in charge of debt capital markets in Japan at Goldman Sachs, which was one of the lead managers for both the deals. “This may pave the way for more deals to come.”

Some market participants were not expecting a successful issue to institutional investors until December.

Bankers said the success of these deals should provide a benchmark, as it illustrates the increase in costs of funding from before and after the collapse of Lehman.

As is the case globally, all companies are being forced to pay more to obtain credit. NTT DoCoMo paid 18 basis points more to issue last week’s 10-year bonds – the highest it has paid since privatisation a decade ago – compared with its June issue, says Goldman Sachs.

That said, those additional basis points are negligible on a global level where IBM was forced to pay 400bp over comparable Treasuries to raise $4bn.

While Japan’s domestic corporate bond market may be showing flickering signs of life for highly rated companies at least, the samurai market (debt issued by foreign institutions to Japanese investors and denominated in yen) remains untapped since the demise of Lehman.