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Capital Markets Weekly: Berkshire Hathaway record Yen deal indicates growing but constrained funding opportunities

13 September 2019 Brian Lawson

Yen issuance

On 6 September, US holding company Berkshire Hathaway sold a record-sized Yen deal for a foreign company. Its JPY 430 billion (USD4.04 billion) six-tranche global yen offering included maturities of five, seven, 10, 15, 20 and 30 years, at coupons from 0.17% to 1.1%. Total corporate supply on the day reached JPY1.7 trillion (USD16 billion), with SoftBank Group placing JPY500 billion of debt and Mitsui Fudosan and Nippon Steel also issuing. According to the Financial Times, the single day's supply equated to 15% of total corporate bond sales in 2018. Dealogic data shows total Samurai supply (foreign bonds sold under Japanese domestic documentation) reached USD6.49 billion by end-August, surpassing the USD4.99 billion record from calendar 1996.

Emerging markets

Mexican state energy firm Pemex announced on 11 September that it has received a state capital injection of USD5 billion, which it will use to prepay debt due between 2020-2023. It also announced plans for a new USD5 billion issue of seven, ten and 30-year debt to refinance short-term liabilities, and a voluntary bond exchange program designed to smooth its maturity schedule. According to the Financial Times, this is likely to target debt maturing in 2022-25 and 2041-48, "to ease the repayment pressure".

It went on to sell an upsized USD7.5 billion package, with total demand of USD38 billion, the largest ever achieved by Pemex according to its statement. This included USD3.25 billion for 10 years at 6.85% and USD3 billion for 30 years at 7.7%.

Mexican companies completed three other international transactions last week. After Grupo Bimbo's success early in the week, BBVA Bancomer and Industrias Peñoles sold a combined USD1.8 billion of debt, the former in the form of USD750 million dated subordinated Tier 2 debt of 15-year tenor, first callable after 10 years, priced at 5.875%. The mining and chemicals company raised USD1.1 billion divided equally between 10 and 30 years, priced at 4.15% and 5.65% respectively. It was followed by Alpek, a petrochemical firm, which raised USD500 million at 4.285%, tightening pricing from 287 basis points over US Treasuries to 255 b.p.

On 11 September, Nigerian telephone towers group IHS raised USD500 million of 7.125% five-year debt and an upsized USD800 million 8% eight year tranche, expanded from USD500 million to reflect demand.

Jamaica also is in the market, with a USD805 million tap of its 7.875% 2045 issue, with the proceeds slated to redeem expensive outstanding debt.

India's Power Finance Corporation gained USD4 billion in demand for a USD750 million two-tranche bond sale, following a similar USD1 billion operation in June. It priced USD300 million of five-year bonds with a 3.25% coupon, and USD450 million for 10 years at 3.9% coupon.

Russian steel firm Severstal launched a five-year dollar deal, with initial price guidance of 3.5% area, and went on to price USD800 million at 3.15%. This is described by Global Capital website as the lowest coupon on record for a corporate bond from the region. It was followed by Chelpipe, which attracted USD1 billion for its USD300 million five-year international debut, priced 4.5% versus 4.75-5% initial guidance. Ukrainian meat producer MHP gained USD1.7 billion of demand for a ten-year USD350 million deal: guidance was tightened from 7% to 6.5-6.625%.

Other debt

The US high grade market started the week by continuing the prior week's high activity levels. 17 new deals were launched on 9 September, alongside five sub-investment grade offerings.

German state agency KFW has raised USD2 billion with a ten-year green issue, the largest agency Green bond to date, which gained an impressive USD4.8 billion of demand.

Despite severe Brexit-related uncertainties in the UK, a syndicated GBP4 billion reopening of the UK's 1.625% 2054 gilt was strongly received. The issue was priced at 0.5 basis points over the yield on the UK's 3.75% 2052 issue, the tight end of guidance. The issue price of 115.557% implied a 1.091% yield to maturity. Demand reached GBP25.8 billion in 85 orders with 81% from domestic buyers. The UK's Debt Management Office noted that this latest sale raises GBP4.6 billion: long-dated gilt sales in the current financial year have reached GBP20 billion. Overall gilt sales for fiscal 2019/20 now total GBP61.1 billion versus a target of GBP117.8 billion.

Our take

Last week's corporate supply, aggregating supply in the US Dollar, Euro, Yen and other segments, reached a record USD140 billion. The record was noteworthy for having been reached without including jumbo acquisition-related issuance. US investment grade companies raised USD72 billion from 45 deals, roughly equaling the total supply during August in just the four working days after Labor Day.

The main attraction of Berkshire's Yen sale for domestic Japanese institutions was its yield: the JPY146.5 billion ten-year tranche offered a return of +0.44%, versus around -0.25% on domestic JGBs (domestic government bonds) of comparable maturity, for a relatively well-known name of high credit standing. Other well-known US corporates like Apple and Proctor & Gamble also have benefitted from Japanese institutions looking for improved returns and diversification without excessive credit risk. The magnitude of Berkshire's issue may encourage more international issuance in Yen, with the Nikkei Asian Review suggesting this would fill a structural gap, with only some 400 Japanese firms - of the 2000 listed on the first section of the Tokyo Stock Exchange - having issued domestic bond debt. The same source notes that a few issuers, like SoftBank, dominate large-scale issue supply in the domestic Yen market.

Despite the investor desire to seek improved returns, Japan's domestic market is characterized by a high degree of investor conservatism and risk aversion. This is indicated by the minimal development of its junk bond market, where the first such issue was conducted by Aiful in late May. At the time, the Financial Times highlighted that Japan's Government Pension Investment Fund had altered its investment criteria in 2018 to permit the purchase of junk bonds with ratings below BB, but that this has not translated into new-found actual investment flows.

While credit diversification in Japan is limited - we have seen no reports of further junk supply - the Yen market shows a similar trend to Europe in its appetite for extended maturities to gain improved returns. In June, the Nikkei Asian Review reported that the average maturity for corporate debt in 2019 exceeded 10 years for the first time in nearly three decades. Our Japanese economist Harumi Taguchi notes that increased Samurai bond issuance "should be very attractive for Japanese financial institutions, particularly for banks and insurance companies which struggle with the BoJ's extraordinary monetary policy".

Within Emerging Markets, the Pemex capital injection is risk positive, and serves as further confirmation of the strategic position and Mexican state backing for the company. Its strategy is designed to reduce near-term repayment burdens, extend duration, and smooth its liability schedule, all risk-positive actions.

Lastly, the UK's impressive long-dated sale shows that UK institutional buyers - which include pension funds and insurers with natural appetite for long dated assets - are relatively calm about the prevailing Brexit-related and electoral uncertainties in the UK. The volume of demand was a clearly-positive indicator: a less encouraging indicator is that the UK has not undertaken significant pre-funding to avoid needing to access markets during any future Brexit-related market volatility.

Posted 13 September 2019 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, IHS Markit

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