Treasury Today Country Profiles in association with Citi

Turning Japanese: a loans market to beat its rivals

Silhouette of a Samurai posing during sunset

Have changing market conditions left Japanese banks better positioned to capture foreign companies' financing demands than rivals in other Asian financial hubs? We ask a Japanese megabank to explain.

In the ongoing quest to offer financial market participants a concise way of representing a new product, the words ‘panda’, ‘masala’ and ‘dim sum’ have earnt their keep in the bond markets as friendly, if somewhat clichéd expressions of their content. Here, however, is one that, superficially, seems less than approachable: the Samurai loan.

Outside of Japan, the word ‘Samurai’ often conjures an image of a fearsome warrior. As it now also applies to a form of syndicated loan issued in Japan to non-Japanese borrowers – perhaps it is too aggressive an image. Market participants should thus rejoice in the now somewhat nominalised meaning of the word (in both Japan and China) as ‘one who serves in close attendance to the nobility’. As a cautious treasurer seeking diversification of a corporate loan portfolio, acknowledgement of their revered status should offer a degree of relief.

Of course, the real comfort comes from the fact that the Samurai loans market is highly liquid, with a wide pool of mainly domestic players in search of an increasing number of highly-rated borrowers seeking funding diversity.

“The banking sector in Japan currently has a loan to deposit ratio of 65% which in essence means the system is under-lending,” explains Daniel Moreno, Senior Originator, Loan Syndications, Mitsubishi UFJ Financial Group (MUFG). “There was a peak of activity back in 2008 when liquidity in the mainstream bank and debt capital markets was somewhat constrained,” he adds. In fact, that year, volumes exceeded $5bn (equivalent) and more than 20 deals were closed, with contracts in Europe finalised for a range of blue chip corporates such as SSE, National Grid and Tesco.

“Volumes have been more modest over the past few years, in part due to copious liquidity in the bank and capital markets fuelled by the actions of the major central banks,” comments Moreno. But in general, foreign companies borrowing cross-border from Japanese financial institutions grew by a third last year as the cost of Japanese financing dropped, affording even small regional lenders a chance to get on the bandwagon. Samurai loan volumes in 2016, he notes, are at a record high with 13 transactions already closed to date with an equivalent aggregate value of over $3bn.

The rise of the Samurai

With the ‘Abenomics’ notion of quantitative easing in Japan already having put downward pressure on domestic lending rates, profitability has been impacted in an environment where investment opportunities in the domestic market are limited. Most recently, incentive to consider alternative higher-yielding investments has come in the form of Bank of Japan’s negative interest rate decision in January, causing real interest rates to fall. The rate of minus 0.1% will be cut “further into negative territory if judged as necessary,” the bank said at the time.

Driving uptake of Samurai loans amongst Japanese regional banks has not been quite so clear-cut though. There has necessarily been a lot of “promotional work” on the part of the Japanese megabanks – MUFG, Sumitomo Mitsui and Mizuho – explains Moreno. The increasing appetite amongst regional institutions is based not only on their need to improve yield on their loan book; there has been considerable background work by the major institutions to get them comfortable moving beyond the simple loan structures they are used to, he notes.

This effort has expanded the current pool of investors to more than 80 active participants, where there were just 20 in 2010. There has also been a widening of lenders’ acceptable investment criteria. Again in 2010, most investors were focused on the highest-rated, well-known listed names. Now Moreno notes that investors are prepared to go slightly lower down the ratings order, and even lend to privately-owned and unrated companies just to seek out a reasonable return in a more crowded market.

Borrowers seeking lenders

On the borrower side, companies with larger funding needs are the most active in this space, not least because it allows diversification of their creditor base. Participants often include major commercial corporates, commodity traders (often unrated, privately-owned and less active in the capital markets), infrastructure-related companies and financial institutions.

Although usually denominated in JPY, these typically three- to five-year arrangements are increasingly based on other major currencies, especially USD. In fact, there is a growing non-JPY appetite for the large Samurai facility.

This is reflected in Dealogic’s figures for March this year. They show two major transactions including $1.4bn to a Japanese-related company (still a Samurai loan by Dealogic’s definition). This was credited to the Japanese megabanks, MUFG and Mizuho at $700m each (the third megabank, Sumitomo Mitsui Financial Group, also takes an active role in this market). Although this particular deal inflates the overall Samurai loan market size to date for 2016 relative to FY2015, it demonstrates ample capacity as well as appetite.

Indeed, in the last few years, the Nikkei Asian Review has reported a stream of Samurai borrowers including big US and Hong Kong electric utilities and a United Arab Emirates state-affiliated institution. It disclosed that MUFG served as lead manager on more than $1.3bn in lending to foreign companies.

It is not just the mega-deals that make up the marker; smaller facilities are offered too. Sandvik, a Sweden-based cutting and drilling tool maker, took JPY36bn ($307m) from a 12-strong regional syndicate including Joyo Bank and The Oita Bank.

Manage to make it work

Pricing considerations demonstrate that Japanese regional banks are flooded with JPY and that most of the domestic players do not have a deposit base in other major currencies. A JPY Samurai facility should thus be cheaper than the same deal in another currency. However, Japanese regional banks are able to tap the US money markets for short-term (less than one year) USD, lending this out over longer periods to profit from the interest rate differential.

Of course, corporates may wish to borrow in JPY and swap to a functional currency via a plain FX transaction and then, when interest payments are due, execute a spot FX deal for the required amount. If the borrower is looking to swap a loan facility from JPY to another currency, obviously the swap rate must be taken into account.

Samurai loans may not suit all corporates, but it is nonetheless an interesting alternative source of funding. Although contracts are based in English law and in English language, often a non-binding (for reference only) translation of the loan agreement and Information Memorandum are provided in order to assist prospective investors in their credit process. The involvement of one of the Japanese megabanks should enable transactions to run smoothly. However, the participation of the likes of MUFG is not just as intermediary, bringing investors and borrowers together, Moreno explains. All are active participants in the Samurai loans market and in taking an active role may act as a sponsor of the borrower where it has proven itself as a long-term client. Megabank involvement thus has an additional benefit in that it gives other, smaller investors a higher degree of comfort.

Although Samurai loans require considered management of individual company circumstances to optimise their value, Moreno believes that their flexibility should be seen as a strength that allows a bespoke approach to meeting a rising number of borrowers’ needs.