Japan is headed for more mergers and acquisitions after a recent deal from one of the country’s biggest telecom firms, and that’s raising hopes for lucrative landmark bond sales to finance the spree.
Nippon Telegraph & Telephone Corp. is planning note offerings to help fund the ¥4.3 trillion purchase of its mobile unit. A big bond sale by the telecom firm would follow huge deals since last year to pay for Takeda Pharmaceutical Co.’s acquisition of Shire PLC, and Asahi Group Holdings Ltd.’s purchase of Anheuser-Busch InBev NV’s Australian business.
For investors, giant bond sales are attractive because issuers usually need to pay a premium to compensate for the added risk of large repayments. While COVID-19 has caused global M&A to tumble this year, many Japanese firms are continuing to eye overseas targets as a shrinking population limits business prospects at home: In a survey of Japanese executives, 57% said they will actively pursue M&A in the next 12 to 24 months, according to consulting firm EY.
“Generally speaking, issuers tend to offer additional coupons — a volume premium — when they are selling bonds bigger than what they normally sell,” said Haruhiro Ikezaki, managing director and head of debt capital markets division at Mitsubishi UFJ Morgan Stanley Securities Co. An increase in demand for corporate bonds after the Bank of Japan expanded its buying of such debt earlier this year may also encourage companies to sell more notes to pay for M&A, he said.
Premiums on big M&A-related bonds may partly explain, for example, pricing on Takeda’s ¥500 billion subordinated bonds sold last year. The 2079 notes that are callable in five years, rated A- by Japan Credit Rating Agency Ltd., had a spread of 175 basis points at issuance. By comparison, Sumitomo Chemical Co.’s similar-maturity ¥100 billion junior debt also sold in 2019 with the same JCR grade had a premium of 85 basis points.
Japanese issuers raising mammoth M&A funds have tended to sell foreign-currency bonds as well on concern that the yen market wouldn’t be able to absorb a huge offering. Takeda has sold dollar and euro notes in recent years, and Asahi this month issued euro debt for the first time in more than three years.
NTT may also choose that option, according to Seiji Matsuzoe, a partner at Baker McKenzie’s Tokyo office who focuses on financing transactions in domestic and overseas capital markets. “It’s possible that the company may combine foreign currency bonds in its funding in order to avoid paying additional costs in the domestic market.”
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