Business / Financial Markets

Nomura sees Chiba Bank blazing bond trail for regionals

Bloomberg

Chiba Bank Ltd. was rewarded for pushing ahead with the first dollar bond sale by a Japanese regional bank even as U.S. corporate borrowing costs leaped.

The lender issued $300 million of notes in the U.S. currency this month at a 2.55 percent yield. That compares with an average 2.81 percent paid by dollar bonds with an A rating on Oct. 30, Bank of America Merrill Lynch indexes show. U.S. corporate bond spreads widened the most in 16 months in mid-October as pestilence, war and economic woe prompted investors to flee riskier debt.

“There are other regional banks considering raising non-yen currencies to fund their offshore expansion,” Malcolm Mui, the Hong Kong-based head of investment-grade syndicate for Asia ex-Japan at Nomura Holdings Inc. — which managed the sale with Goldman Sachs Group Inc. — said in an Oct. 24 interview. “Some of these regional banks have international expansion plans.”

Chiba is joining Japanese companies including the nation’s biggest bank, Mitsubishi UFJ Financial Group Inc., in selling a record amount of dollar-denominated bonds this year as the Federal Reserve stays on a path to raising interest rates in 2015. The central bank voted this week to proceed with plans to end its third round of asset purchases, pushing up short-term borrowing rates by the most in 3½ years.

The average yield premium over Treasuries on U.S. corporate bonds rose 5 basis points to 129 on Oct. 15, the most since June 24, 2013, Bank of America Merrill Lynch data show. Concerns the world economy is slowing and the spreading of Ebola to a second health care worker in the U.S. sent stocks there to the lowest in eight months on the same day, wiping $2.1 trillion dollars off shares over six weeks.

Stock markets have rebounded since as the U.S. economy has shown strength. U.S. gross domestic product grew at a 3.5 percent annualized rate in the three months ended September after a 4.6 percent gain in the second quarter, Commerce Department figures showed Thursday in the strongest back-to-back readings since the last six months of 2003.

Japanese borrowers have sold a record $51.8 billion worth of dollar notes so far this year, according to data compiled by Bloomberg. Financial companies including Sumitomo Mitsui Financial Group Inc., the nation’s second-largest bank by market value, and Dai-ichi Life Insurance Co., the nation’s second-largest life insurer, accounted for most of the sales.

“Overseas credit investors were able to get a better understanding not just of Chiba Bank but of Japan’s regional lenders overall in this deal,” Hiroyuki Sugiura, a vice president at Goldman Sachs’ investment banking division in Tokyo, said in an interview Thursday. “In that sense, it is very significant.”

While Chiba’s is the first vanilla dollar bond for a Japanese regional, according to the sale managers, such lenders have been ramping up zero-coupon dollar convertible note sales since last year as Prime Minister Shinzo Abe’s policies boosted local share prices. Nomura and Goldman Sachs managed the first dollar convertible bond by a Japanese company since 2002 last year, when Shizuoka Bank Ltd. sold $500 million of notes.

At least five other regional banks have followed since, including Joyo Bank Ltd. and Gunma Bank Ltd., to sell a total $1.5 billion of the notes as investors bet on the lenders’ share prices rising.

While Chiba considered convertible bonds, the lender chose to sell notes that aren’t able to be swapped into equity because it wants to avoid diluting current shareholders, as well as create a stable debt investor base, according to Makoto Ito, a senior manager in Chiba’s corporate planning division. The bank intended to hold investor meetings in Asia and Europe from Oct. 20, a person familiar with the matter said Oct. 16.

“We felt we could raise the funds at around the rate we anticipated, and from the week of the 20th, credit markets started to settle down,” Ito said in an Oct. 29 phone interview. “We thought it best to raise the funds this year amid expectations of higher U.S. rates next year and for tapering to end” in October, he said.

Average interest rates on new loans in Japan fell to 0.767 percent in August, the lowest in Bank of Japan data going back to 1993. In mid-October, the average interest margin on dollar loans in the Asia-Pacific region excluding Japan was 2.3 points more than the London interbank offered rate, according to data compiled by Bloomberg.

Regional lenders had core profits of ¥1.6 trillion ($14.7 billion) in the year ended March 31, trailing the ¥2.5 trillion income of city banks, according to Japanese Bankers Association data.

The yen hit a six-year low of 110.09 on Friday.

“We’re seeking to diversify our sources of profit and increase assets in overseas currencies,” Chiba’s Ito said.