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Foreign issuers bring change to Japan's bond market practices

[TOKYO] Japan's growing appetite for overseas bonds is raising a debate over the role of global practices in the yen markets.

Three of the four companies that have sold global yen bonds so far this year used the pot system to manage orders and allocations, in line with global standards, rather than the retention system dominant in Japan.

Japanese buyers snapped up the bonds from Corning Inc, Wal-Mart Stores Inc and Aflac Inc, suggesting the pot approach might be gaining acceptance in the country's ultra-conservative investor base.

"It is a familiar practice to those that issue in US dollars and euros," said a Japanese banker. "I think issuers feel relieved as the pot helps to see a whole picture of bookbuilding and brings transparency. So, in global yen deals, the pot is now increasingly used."

Under the pot system, the joint lead managers share information and input investor orders into a single book. Global bankers insist the system makes the bookbuilding process more efficient, while issuers like to see which investors are buying their bonds and how books are building in real time.

In the retention system, each underwriter builds its own book of investor orders without sharing investor lists with other syndicates. The underwriter then retains its own allocation and delivers the bonds to its own customers.

The global yen deals from Apple Inc and Procter & Gamble in 2015 were unusual, as they used both systems - the retention for domestic marketing and the pot for overseas marketing.

In 2016, International Business Machines Corp used only a pot system for 42 billion yen (S$523.78 million) of 10-year global yen bonds.

Aflac, which used to sell Samurai bonds under the traditional retention system, switched to the pot system in January, when it sold 60 billion yen of 10-year global bonds.

Of this year's global yen issuers, only Starbucks Corp chose to use the retention system for a 85 billion yen offering of sustainability bonds in March.

Some bankers argue that the pot system should be considered for domestic and Samurai bonds, as well. That, however, will require underwriters to share details of their investor orders with other syndicate members - something they have long resisted, citing Japan's strict rules on client confidentiality.

"I am sceptical that arrangers are economically rational if they do not share investors' names during the bookbuilding process. So, I think it's time to discuss whether to share investors' names," said a Tokyo-based banker at a global institution.

"To begin with, I would suggest sharing the names of institutional investors." Others, however, are less keen on a change to the status quo.

"You often see no real reason to push for the pot," said a second Japanese banker. "Some investors want you not to share your investor lists, so a deal size may not grow if you push for the pot even when your customers say no."

The same debate raged in Europe in the early 2000s, when local arrangers fiercely resisted US-led efforts to introduce the pot system in the Eurobond market. The format eventually took hold, however, as issuers valued the greater transparency and investors welcomed increased secondary liquidity.

The pot system is rare in Japan's domestic market, but not entirely unprecedented. Mitsubishi Corp used the shared-book approach for a 200 billion yen triple-tranche 60-year subordinated offering in September 2016, which Mitsubishi UFJ Morgan Stanley, Mizuho Securities and SMBC Nikko arranged.

While more Japanese investors are becoming comfortable with the global style, bankers still sense some hesitation.

"I haven't seen Japanese investors come up to us asking for the pot," said the foreign banker. "The whole market won't easily shift to the pot system." Still, the growing acceptance of the format is the latest sign that ultra-low returns are reshaping demand patterns in Japan's domestic market.

Japanese pension funds, typically among the most conservative investors, bought into Corning's 78 billion yen global bonds on Aug 3, even though the issue came without Japanese language documentation and was done under New York law.

As investors broaden their horizons, bankers expect to see a range of different options in the yen market, even if the pot system is unlikely to catch on overnight.

"The pot system is more efficient, so we have seen more and more pot deals," said a second foreign banker. "We will be able to compare both systems, which will be quite interesting."