The head offices of Mizuho Financial Group and Mizuho Bank in Tokyo. Mizuho Financial Group is cautious on the outlook for next year as yields approaching 0% put off investors.
Bloomberg
Mizuho Financial Group, set to become the biggest underwriter of Japanese corporate bonds in 2014, is cautious on the outlook for next year as yields approaching zero% put off investors.
Mizuho overtook Nomura Holdings earlier this month, managing 22.5% of ¥7.32tn ($61bn) in sales excluding self-led issues, according to data compiled by Bloomberg. Deals decreased 3.3% from a year earlier. Billionaire Masayoshi Son’s SoftBank Corp issued ¥1.1tn in notes to individuals this year to help fund acquisitions, accounting for 13% of total offerings.
The Bank of Japan’s increased bond buying since October has pushed average corporate yields to a record low 0.27% and four-year sovereign debt yields below zero, forcing top-rated issuers to offer extra premiums. Company notes are at risk of falling again next year if investors and sellers aren’t capable of finding mutually-acceptable terms, according to Mizuho.
“While it is going to be much more difficult than before under these very low interest rates, finding exactly the point that is satisfactory to both investors and issuers is going to be important,” Satoru Yamaguchi, a senior executive at Mizuho Securities Co, a unit of Japan’s third-largest bank, said in an interview. “With interest rates falling so far, we’ve hit a point in Japan where it is like ‘where do we go from here?’”
Mitsubishi UFJ Morgan Stanley Securities Co, a joint- venture of Morgan Stanley and Mitsubishi UFJ Financial Group, Japan’s biggest bank, ranked third at 18.8% of deals, while Daiwa Securities Group was fourth at 16.7%.
Nomura, which underwrote 21.7% of this year’s total, was the leader from 2011 to 2013, according to data compiled by Bloomberg. Mizuho’s lead over Nomura is even greater when group company note offerings are included. Mizuho Financial, the holding company, and Mizuho Bank, the largest banking unit, sold ¥520bn in debt this year, second only to SoftBank in terms of issuances.
Four-year Japanese government bond yields were at minus 0.02% last week, and yields as long as seven years were less than 0.1%. With the BoJ offering deposit-taking institutions an interest rate of 0.1% on excess funds placed with it, that level has become a floor for pricing regardless of previous credit spread levels. No corporate bond issuer has offered less than that this year.
Companies with high debt scores such as Sekisui House, graded AA by Japan Credit Rating Agency, and Nissan Motor’s auto credit subsidiary both sold three-year bonds at 0.11% last month. The two, which have offered yield premiums of less than 10 basis points in previous sales, are in effect compensating investors for disappearing base interest rates by offering higher spreads than that.
“Higher-rated issuers such as government agencies and municipalities are being forced to price bonds regardless of spreads,” said Masanori Azuma, the head of the debt capital markets department in Tokyo at Nomura Securities Co, Japan’s biggest brokerage. “Sales that should really be discussed in terms of spreads are now being restricted by absolute yield levels when priced because of the effects of monetary policy.”
The city of Kobe, rated AA by Japan’s Rating & Investment Information, sold five-year notes on December 11 at 0.101%, showing that investors are chasing even 1/10 of a basis point more than the BoJ’s deposit rate for lenders.
If the bond market moves too far to pricing terms favourable to issuers, investors won’t buy, and if investors demand too much, issuers will turn to bank loans, according to Mizuho’s Yamaguchi. Issuers are likely to sell more 10-year notes as they still give positive yields, with better-rated borrowers offering debt as long as 20 years, he said.
Companies aren’t taking on unneeded debt even at current levels and have plentiful cash, according to Nomura’s Azuma. That will probably cap sales next year, he said.
“With the exception of government bonds, we’re not likely to see much of an increase in sales next year,” said Mizuho’s Yamaguchi.
Japan to ‘steadily reduce’ new bond issue next year
Japan’s government said it would “steadily reduce” new government bond issuance for the next fiscal year from that planned for the current year ending in March 2015 in a bid to curb runaway public debt.
In a draft budget outline submitted to the top economic council, Tokyo also pledged to “do its utmost” to meet its goal of halving the country’s primary budget deficit in the next fiscal year. The outline, to be endorsed by the cabinet by year-end, highlighted the delicate balance Prime Minister Shinzo Abe must strike in reviving the economy while reining in public debt.
Japan’s public debt tops twice the size of its economy, by far the worst in the developed world.
In a show of Abe’s resolve to keep Japan’s public finances from deteriorating further, the government will lower new bond issuance for the next fiscal year for a third straight year.
Based on the budget outline, the government is expected to draft an annual budget for the next fiscal year in January.
In the draft outline, the government reiterated its pledge to bring the primary balance, excluding new bond sales and debt servicing, into the black by the fiscal year to March 2021.
“We will create a positive cycle between economic revival and fiscal consolidation by achieving a strong economy to boost tax revenue while accelerating efforts to curb spending without making any sector sacrosanct,” it said.
