Euroyen bonds offer size and speed for banks seeking regulatory capital. Are more deals on the way?
A ¥102 billion ($910 million) Euroyen bond sale by French bank BNP Paribas at the end of August highlighted the market’s attractions and complementary role to the Samurai market. Nomura was joint bookrunner for the deal, which required just two days of marketing and, unlike a Samurai bond, did not need dual-language documentation. The transaction could pave the way for other similar deals from some of the world’s largest banks.
“This kind of transaction shows that the Euroyen format can deliver benchmark size and rapid execution,” says Akihiro Igarashi, Executive Director, Investment Banking Division, Nomura in Japan. “This demonstrates that Euroyen offers an alternative to the Samurai and highlights the flexibility of the yen market.”
This senior non-preferred bond deal came with a ¥85.3bn five-year tranche and a ¥16.7 billion 10-year tranche; both add to the French bank’s Total Loss Absorbing Capacity (TLAC), which are loss-absorbing liabilities that can easily be converted into capital if a bank gets into trouble. TLAC is the standard applied to Global Systemically Important Banks (G-SIBs) such as BNP Paribas and has been an important driver of bank debt issuance in recent years.
A growing number of European banks operate in the yen market and usually issue in the Samurai market (as domestic bond market deals by international borrowers are known.) However, Nomura and joint bookrunner BNP Paribas were eager to take advantage of strong market conditions and instead opted for a Euroyen bond (issued in the Eurobond market but denominated in yen) from the issuer’s existing EMTN programme.
“A key advantage of Euroyen compared to Samurai issuance is its greater flexibility,” says Garry Jaskierowicz, Vice President, Debt Capital Markets at Nomura.
Traditionally, Samurai deals have up to two days during which investors are ‘sounded out’ about their appetite and price expectations, followed by up to a week where the bond is marketed. Samurai deals are marketed to retail and professional investors and place a relatively heavy burden on issuance in terms of documentation and continuous disclosure in Japanese while disclosure requirements also limit the available window for issuance.
In contrast, this Euroyen deal was issued off the bank’s existing EMTN programme – Nomura effectively facilitated an advantageous meeting of East and West – meaning there were fewer documentation requirements and it was marketed as a private placement to qualified institutional investors only. That meant BNP Paribas could come to market at a time when disclosure requirements would prohibit a Samurai issue. In addition, it dramatically accelerated the deal timetable: the bookrunners gathered feedback about pricing for just one day, before marketing the transaction for two days.
“Although the Euroyen format limited the potential pool of demand in Japan, domestic investors are familiar with EMTN deals and have been participants in numerous private placements in yen as well as in other currencies,” says Jaskierowicz. “This bond shows that there is sufficient demand for Euroyen to issue in benchmark size using the EMTN format. It’s not a replacement for the Samurai format but a complementary market that gives issuers additional flexibility.”
Many international issuers that access yen market do not have yen funding needs and target the market to achieve investor diversification or access attractive borrowing costs. Swap market conditions are therefore an important component in any deal for an international issuer.
Strong demand enabled the five year non-preferred senior bonds to price at 48bp over yen offer swaps and the 10-year bonds at 62bp over – tighter levels than those available in other markets at the time, and inside BNP Paribas’s euro curve.
“The yen market has become significantly more attractive in the past year, given the favourable movement in the JPY/EUR swap rates,” explains Morven Jones, Head of Debt Capital Markets at Nomura. “We are hopeful that these conditions continue, potentially creating a suitable issuance environment for a range of borrowers.”
As well as the cost of swaps, an important consideration for international issuers is their exposure to basis swap risk during marketing. The shorter marketing period of Euroyen deals compared to Samurai issues should therefore reinforce the potential attractiveness of the yen market for international issuers, according to Igarashi. “Ordinarily with a Samurai issue, issuers are exposure to basis swap risk for a week,” he says. “A combination of a short marketing period and swift execution for a Euroyen issue reduces basis swap risk, which should make the yen market more attractive for international issuers.”
JFSA opens window
BNP Paribas’s decision to issue in Euroyen followed the ruling by the Financial Services Agency (JFSA) on the risk weighting that bank investors have to apply if they hold TLAC-eligible bonds. In April, the JFSA said that domestic standard banks should apply a risk-weight of 150% to TLAC senior bonds. However, these new risk weights only apply to bonds issues from April 2019; until then normal risk weights, which are lower, will apply.
The JFSA announcement facilitated this deal by allowing bank treasury accounts in Japan, which had been wary about the likely impact of risk weightings on their investment portfolios, to buy TLAC-eligible issues. In addition to bank treasury demand, BNP Paribas’s five-year bonds attracted key accounts across a wide range of domestic banks and international accounts, which were joined in the 10-year tranche by a number of Japanese life insurance companies.
Other G-SIBs are expected to take advantage of the limited issuance window effectively created by the JFSA announcement.
“The JPY swap rate for both EUR and USD remains attractive, making it worthwhile for international borrowers to tap Japanese investors and take advantage of the strong demand for such issuers,” says Jaskierowicz.
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Head of DCM, Nomura
Executive Director, GM IBD
Vice President, Debt Capital Markets
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