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Negative rates encourage Japan firms to issue long-dated bonds
[TOKYO] The Bank of Japan's (BOJ) decision to impose negative interest rates has spurred some companies to seek to lock in cheap funding with long maturities that investors once balked at.
Traditionally, investors deemed only a few companies such as utilities and railway corporations to have sufficiently reliable income to issue bonds with maturities beyond 10 years. For everyone else, uncertainty about long-term profitability blocked deals.
But now, as yields on short-term bonds have evaporated since the BOJ cut interest rates to negative levels in its latest bid to revitalise the Japanese economy, investors have increasingly sought to earn the higher yields that long-term bonds offer.
Railway operators have recently raised funds at long maturities, but so have a food company and a discount shop chain. "The pool of investment vehicles with positive yields is shrinking fast, and investors pursuing an absolute value strategy are moving quickly to secure bonds that still offer yield," said Toshihiro Uomoto, chief credit strategist at Nomura Securities.
In February, West Japan Railway Co. launched 10 billion yen (US$89.53 million) of 40-year debt, the longest maturity ever issued by a Japanese company, according to DealWatch, a Thomson Reuters Japanese language service.
An official at the railway operator, known as JR West, said it wanted to diversify its borrowing and went for an ultra-long bond based on strong investor demand.
The bonds, which will repay debt, were sold at 45.5 basis points over Libor (London Interbank Offered Rate), with life insurers among the main buyers.
They were quickly followed by food company Ajinomoto Co Inc. , which launched 25 billion yen (US$220 million) of 20-year bonds, an unusually long maturity for a manufacturer.
With 80 per cent of Japanese government bonds, or maturities of up to 11 years, trading at negative yields, investors are under to pressure to find investments with decent returns.
For their part, companies like such long-dated bonds because it allows them to secure low-cost financing for a long time. "We are likely to see more companies launch bonds in durations like 20-years, a maturity which had been dormant issuance-wise," said Takayuki Atake, manager of credit research at SMBC Nikko Securities.
On Friday, rail operator Keio Corp launched 15-year bonds, its longest such issue since 20-year bonds in 2007, while Don Quijote Holdings, a discount shop chain, sold 10-year bonds, its longest maturity ever.
While analysts expect issuance to continue, they doubt it will provide a big windfall for the Japanese corporate bond market.
That market has been shrinking and "is unlikely to grow much," Atake said. "Banks try to actively lend money under BOJ's easy policy and it is cheaper for companies to borrow from them rather than issue debt." According to the Japan Securities Dealers' Association, total corporate bond issuance fell to a 10-year low of 6.848 trillion yen (US$61.31 billion) in 2015.