Samurai Bond Market Shut by Lehman Roils Investors (Update1)
By Oliver Biggadike
Sept. 26 (Bloomberg) -- The fastest-growing part of the global corporate debt market, samurai bonds, has come to a standstill since Lehman Brothers Holdings Inc. became the first borrower to default on the securities since Argentina in 2002.
Deutsche Bank AG, Societe Generale SA and National Grid Gas Plc canceled sales of yen bonds issued by overseas borrowers in Japan after New York-based Lehman filed for bankruptcy on Sept. 15. The securities firm's collapse left Japanese investors holding 195 billion yen ($1.8 billion) of its debt.
``The Lehman shock is fatal to the samurai bond market for now,'' said Koyo Ozeki, head of Asia-Pacific credit research at the Tokyo unit of Pacific Investment Management Co., manager of the world's biggest bond fund. ``Investors believed Lehman and others were too big to fail.''
The samurai market was one of the only bond markets to expand in a year when the subprime mortgage contagion caused corporate sales to decline 24 percent in the U.S., according to data compiled by Bloomberg. Citigroup Inc., Wal-Mart Stores Inc. and Goldman Sachs Group Inc. led 2.6 trillion yen of samurai sales, up from 2.2 trillion yen in all of 2007.
Merrill Lynch & Co. predicted in July that sales could exceed 3 trillion yen this year for the first time since 1996 as a seizure in global credit markets curbed investor appetite for all but the safest government debt and borrowers sought new pools of capital.
Lehman's Samurais
Lehman, whose samurai debt included 22 billion yen of 2.23 percent notes maturing 2017, 56 billion yen of 1.69 percent securities due in 2012 and 25 billion yen of 0.94 percent notes maturing on Dec. 19, shut off that source of funding. Argentina missed payments starting in March 2002 on its 4.85 percent note that was due in September 2005.
The firm, once the biggest U.S. underwriter of mortgage backed securities that helped spur the seizure in credit markets, sought protection from creditors in the biggest bankruptcy. Lehman owes its 10 largest unsecured creditors more than $157 billion, including $155 billion to bondholders, according to its bankruptcy filing.
Lehman's failure, combined with the U.S. takeovers of Washington-based Fannie Mae, Freddie Mac in McLean, Virginia, and New York-based insurer American International Group Inc. roiled markets already wary of investing in anything except government debt. Congressional negotiators said yesterday in Washington that they reached a bipartisan agreement on a ``set of principles'' for a $700 billion financial-rescue package to inject fresh capital into the credit markets.
``The U.S. Treasury may regret the outcome of Lehman once the crisis is concluded,'' said Pimco's Ozeki. ``History will prove it would have been cheaper to save Lehman than deal with the cost of failure.''
`Very Reluctant'
``Investors don't know which banks will survive and which banks will collapse,'' said Tetsushi Nagato, a credit analyst at Schroder Investment Management Japan Ltd., whose parent company manages about $259 billion. ``Most Japanese investors are very reluctant to tap into the samurai market right now.''
The yield on New York-based Goldman Sachs's 18.3 billion yen of 2.11 percent notes due January 2013 rose to 5.26 percentage points above benchmark yen swaps yesterday, from 1.1 percentage points when the debt was sold in January, Bloomberg data show.
Japanese banks and insurers including Mitsubishi UFJ Financial Group Inc., the nation's biggest lender, have announced 249 billion yen of potential losses tied to Lehman's collapse.
Feudal Warrior
``We'll take a wait-and-see approach when it comes to investing in U.S. companies,'' said Yuki Sakurai, a director in the financial planning department at Fukoku Mutual Life Insurance Co. in Tokyo. ``We can't help but feel cautious.''
Samurai bonds, named after the nation's feudal warrior class famed for their sharp, curved swords, started in 1970 when the Manila-based Asian Development Bank, funded by regional governments to reduce poverty, issued the debt.
Sales rose this year as the lowest Japanese government-bond yields in three years encouraged investors in the world's second- largest economy behind the U.S. to buy higher-coupon corporate debt. At the same time, borrowers could obtain lower rates in Japan than in their home markets.
New York-based Citigroup was the last U.S. company to issue samurais, raising a record 315 billion yen from three-year, 3.22 percent notes this month before the Lehman bankruptcy.
Wal-Mart of Bentonville, Arkansas, sold 100 billion yen of samurais in July, the first by a foreign retailer in 29 years. The coupon on the five-year portion of the sale was about half what Wal-Mart committed to pay on similar-maturity notes sold in the U.S. on April 8, excluding adjustments for currency swaps.
Sales Postponed
Deutsche Bank, based in Frankfurt, and National Grid of London said on Sept. 17 they postponed plans to sell samurais because of the disruption in the market.
Societe Generale also shelved its offering, said a person with direct knowledge of the decision who declined to be named because the details weren't announced. Emmanuelle Renaudat, a spokeswoman for the Paris-based bank, declined to comment.
HSBC Finance Corp. and New Zealand's government are the two remaining borrowers which have filed with Japan's Ministry of Finance for permission to sell the securities and have yet to do so, Bloomberg data show.
New Zealand
New Zealand has no plans to sell yen bonds and refreshes its samurai registration every two years, said Andrew Turner, head of portfolio management for New Zealand's Debt Management Office.
HSBC Finance, the Prospect Heights, Illinois-based unit of HSBC Holdings Plc in London, also isn't likely to borrow, and filed with the Ministry in July to ``renew its debt issuance shelf,'' spokeswoman Diane Soucy Bergan said in an e-mail.
The failure of securities firms including Lehman and Bear Stearns Cos. reminded Japanese investors of what happened in their country in the 1990s, according to Akira Takei, who as general manager for international bonds helps manage $2.46 billion for Mizuho Asset Management Co. in Tokyo.
Japan's banking system imploded after a real-estate bubble burst, saddling the nation's financial sector with as much as 30 trillion yen in bad loans and prompting the government to orchestrate a rescue and reorganization.
``It was very scary,'' Takei said. ``Lehman's filing for Chapter 11 is a symbol of the end of the U.S. investment banks.''
To contact the reporter for this story: Oliver Biggadike in Sydney at [email protected].
Last Updated: September 25, 2008 23:52 EDT
By Oliver Biggadike
Sept. 26 (Bloomberg) -- The fastest-growing part of the global corporate debt market, samurai bonds, has come to a standstill since Lehman Brothers Holdings Inc. became the first borrower to default on the securities since Argentina in 2002.
Deutsche Bank AG, Societe Generale SA and National Grid Gas Plc canceled sales of yen bonds issued by overseas borrowers in Japan after New York-based Lehman filed for bankruptcy on Sept. 15. The securities firm's collapse left Japanese investors holding 195 billion yen ($1.8 billion) of its debt.
``The Lehman shock is fatal to the samurai bond market for now,'' said Koyo Ozeki, head of Asia-Pacific credit research at the Tokyo unit of Pacific Investment Management Co., manager of the world's biggest bond fund. ``Investors believed Lehman and others were too big to fail.''
The samurai market was one of the only bond markets to expand in a year when the subprime mortgage contagion caused corporate sales to decline 24 percent in the U.S., according to data compiled by Bloomberg. Citigroup Inc., Wal-Mart Stores Inc. and Goldman Sachs Group Inc. led 2.6 trillion yen of samurai sales, up from 2.2 trillion yen in all of 2007.
Merrill Lynch & Co. predicted in July that sales could exceed 3 trillion yen this year for the first time since 1996 as a seizure in global credit markets curbed investor appetite for all but the safest government debt and borrowers sought new pools of capital.
Lehman's Samurais
Lehman, whose samurai debt included 22 billion yen of 2.23 percent notes maturing 2017, 56 billion yen of 1.69 percent securities due in 2012 and 25 billion yen of 0.94 percent notes maturing on Dec. 19, shut off that source of funding. Argentina missed payments starting in March 2002 on its 4.85 percent note that was due in September 2005.
The firm, once the biggest U.S. underwriter of mortgage backed securities that helped spur the seizure in credit markets, sought protection from creditors in the biggest bankruptcy. Lehman owes its 10 largest unsecured creditors more than $157 billion, including $155 billion to bondholders, according to its bankruptcy filing.
Lehman's failure, combined with the U.S. takeovers of Washington-based Fannie Mae, Freddie Mac in McLean, Virginia, and New York-based insurer American International Group Inc. roiled markets already wary of investing in anything except government debt. Congressional negotiators said yesterday in Washington that they reached a bipartisan agreement on a ``set of principles'' for a $700 billion financial-rescue package to inject fresh capital into the credit markets.
``The U.S. Treasury may regret the outcome of Lehman once the crisis is concluded,'' said Pimco's Ozeki. ``History will prove it would have been cheaper to save Lehman than deal with the cost of failure.''
`Very Reluctant'
``Investors don't know which banks will survive and which banks will collapse,'' said Tetsushi Nagato, a credit analyst at Schroder Investment Management Japan Ltd., whose parent company manages about $259 billion. ``Most Japanese investors are very reluctant to tap into the samurai market right now.''
The yield on New York-based Goldman Sachs's 18.3 billion yen of 2.11 percent notes due January 2013 rose to 5.26 percentage points above benchmark yen swaps yesterday, from 1.1 percentage points when the debt was sold in January, Bloomberg data show.
Japanese banks and insurers including Mitsubishi UFJ Financial Group Inc., the nation's biggest lender, have announced 249 billion yen of potential losses tied to Lehman's collapse.
Feudal Warrior
``We'll take a wait-and-see approach when it comes to investing in U.S. companies,'' said Yuki Sakurai, a director in the financial planning department at Fukoku Mutual Life Insurance Co. in Tokyo. ``We can't help but feel cautious.''
Samurai bonds, named after the nation's feudal warrior class famed for their sharp, curved swords, started in 1970 when the Manila-based Asian Development Bank, funded by regional governments to reduce poverty, issued the debt.
Sales rose this year as the lowest Japanese government-bond yields in three years encouraged investors in the world's second- largest economy behind the U.S. to buy higher-coupon corporate debt. At the same time, borrowers could obtain lower rates in Japan than in their home markets.
New York-based Citigroup was the last U.S. company to issue samurais, raising a record 315 billion yen from three-year, 3.22 percent notes this month before the Lehman bankruptcy.
Wal-Mart of Bentonville, Arkansas, sold 100 billion yen of samurais in July, the first by a foreign retailer in 29 years. The coupon on the five-year portion of the sale was about half what Wal-Mart committed to pay on similar-maturity notes sold in the U.S. on April 8, excluding adjustments for currency swaps.
Sales Postponed
Deutsche Bank, based in Frankfurt, and National Grid of London said on Sept. 17 they postponed plans to sell samurais because of the disruption in the market.
Societe Generale also shelved its offering, said a person with direct knowledge of the decision who declined to be named because the details weren't announced. Emmanuelle Renaudat, a spokeswoman for the Paris-based bank, declined to comment.
HSBC Finance Corp. and New Zealand's government are the two remaining borrowers which have filed with Japan's Ministry of Finance for permission to sell the securities and have yet to do so, Bloomberg data show.
New Zealand
New Zealand has no plans to sell yen bonds and refreshes its samurai registration every two years, said Andrew Turner, head of portfolio management for New Zealand's Debt Management Office.
HSBC Finance, the Prospect Heights, Illinois-based unit of HSBC Holdings Plc in London, also isn't likely to borrow, and filed with the Ministry in July to ``renew its debt issuance shelf,'' spokeswoman Diane Soucy Bergan said in an e-mail.
The failure of securities firms including Lehman and Bear Stearns Cos. reminded Japanese investors of what happened in their country in the 1990s, according to Akira Takei, who as general manager for international bonds helps manage $2.46 billion for Mizuho Asset Management Co. in Tokyo.
Japan's banking system imploded after a real-estate bubble burst, saddling the nation's financial sector with as much as 30 trillion yen in bad loans and prompting the government to orchestrate a rescue and reorganization.
``It was very scary,'' Takei said. ``Lehman's filing for Chapter 11 is a symbol of the end of the U.S. investment banks.''
To contact the reporter for this story: Oliver Biggadike in Sydney at [email protected].
Last Updated: September 25, 2008 23:52 EDT
