M&A boom in Japan is fuelling record corporate bond sales

[TOKYO] Corporate bond issuance in Japan is poised to breach a record this year on growing funding demand for mergers and acquisitions (M&A) as the economy continues to move away from three decades of deflation.

The appetite for funds is outweighing concerns about the Middle East conflict after the US and Iran failed to reach an agreement as the war enters its seventh week. Yen bond issuance in Japan has been unfazed, with sales rising 94 per cent in March on a year earlier. That is more than four times faster all global corporate debt combined, according to data compiled by Bloomberg.

“We expect issuance to remain at a high level in the current fiscal year” because of funding needs for M&A, said Dai Otsu, head of debt syndication at Daiwa Securities. The brokerage was the third-biggest underwriter of yen-denominated corporate bonds for the fiscal year just ended in March, Bloomberg data showed.

Daiwa estimates corporate bond sales in Japan to rise to an all-time high of 16.5 trillion yen (S$132 billion) for this fiscal year, up from 15.9 trillion yen last fiscal year. Bankers at Mizuho Securities, SMBC Nikko Securities, Nomura Securities and Mitsubishi UFJ Morgan Stanley Securities also said late March that bond sales may reach record levels this year.

Japan has become one of the world’s most active markets for M&A in terms of deal growth, as the nation’s companies face pressure from investors to deploy cash into growth investments.

While firms have traditionally relied on bank loans for funding, bonds are becoming more popular, particularly for big-ticket financing and longer-dated projects. The total value of outbound deals last calendar year reached about 31 trillion yen, the highest on record, according to Bloomberg data.

“Companies cannot rely solely on bank lending, and banks themselves are not seeing deposits increase significantly even as lending grows,” said Noritaka Oda, head of debt syndicate at SMBC Nikko Securities.

Oda sees corporate bond sales rising by 800 billion yen to March 2027, even as Japan’s credit market saw a slow start to the year because of Iran war-related volatility. Refinancing of bonds issued during the Covid-19 pandemic is also supporting overall issuance, he added.

Estimated redemptions of Japanese domestic corporate bonds will increase more than 8 per cent to 11.2 trillion yen this fiscal year, according to data compiled by Bloomberg.

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Even so, there are signs that the Middle East conflict is weighing on the market. Bridgestone last week postponed a bond sale by a week in order to monitor market conditions.

Any increase in volatility due to Middle East tensions may impact sales terms and investor demand, said Hisashi Kawada, executive director for the debt capital markets group at Nomura Securities. That said, strong demand for funding because of large M&A deals, as well as demand for refinancing in this fiscal year, puts issuance on track to hit another record, he said. BLOOMBERG