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JAPAN IN THE CAPITAL MARKETSMay 2020

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CONTENTS

Japan in the Capital Markets | May 2020 | 1

SRI2 Japanese investors nurture domestic SRI market

SOCIAL BONDS ROUNDTABLE6 Social bonds: Japan leads from the front

INTERNATIONAL FUNDING 12 Japanese issuers face uncertainty in dollars, yen

TOP CREDITS ROUNDTABLE14 Japan’s top credits: navigating volatility

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2 | May 2020 | Japan in the Capital Markets

SRI

Green bonds have become an increasingly popular funding tool, as companies, banks and

governments strive to battle climate change. They are now so ubiquitous that many people equate social-ly responsible investing with green bonds. But the environment is just one piece of the puzzle — and Japan proves how much room there is for social investing to grow.

Japan is a clear leader in social bonds. Chinese issuers, leaders in green bonds in the world, sold their first international social bond ear-lier this year, when Bank of China turned to investors in Hong Kong and Macau. Japanese issuers, in con-trast, have been selling social bonds since 2016, according to Dealogic data. And they were keen buyers of themed bonds long before then.

Japanese investors like to approach investing through an envi-ronmental, social and governance (ESG) lens, a label that allows more flexibility than narrowly-focused green investing, says Koji Shima-moto, president of Société Générale Securities Japan. Issuers have fol-lowed suit. The Development Bank of Japan, for instance, has opted to use a sustainability label for some of its dollar bonds since 2016. Sustain-ability labels combine a social and green use of proceeds.

Amid the Covid-19 pandemic, issu-ers are turning to social bonds to off-set the impact of the virus, meaning a drop in green issuance but a new supply of social notes. More than $9bn of social bonds were issued in the three weeks ending on April 14.

In Asia, the likes of the Repub-lic of Indonesia, Bank of China and South Korea’s Kookmin Bank have sold Covid-19 response bonds. The use of proceeds for these notes fits perfectly under the UN’s Sustainable Development Goals, as they incorpo-rate access to healthcare and related

equipment, in addition to funding for SMEs, among other initiatives. Banks have liked to raise funds for SME-linked relief, which allows them to give loans at preferential rates, effectively creating jobs and support-ing the economy.

“If you think about where capital needs to get diverted under the pan-demic… it has to do with the health-care infrastructure, wellbeing, access to essential services and mitigat-ing the social and economic fallout from the virus,” says London-based Jarek Olszowka, head of sustainable finance at Nomura. “You’re going to see two strands of social bonds, one for healthcare and supply chains for food security, and the other for providing economic support for vulnerable populations, for exam-ple through financing projects aim-ing at preventing unemployment or providing support to SMEs.”

Japanese borrowers are yet to sell a Covid-19 relief bond, but that may be because the country was slow to respond to the outbreak. It wasn’t until April 7 that prime min-ister Shinzo Abe declared a state of emergency in Tokyo and six other prefectures, which account for just less than half of Japan’s population.

Follow the trendOlszowka expects Japan to follow the trend of social and sustainabil-ity Covid-19 relief bonds, with pub-lic sector entities like Japan Inter-national Cooperation Agency (JICA) potentially opting to sell Covid-19 social bonds, as well as some of the largest banks and possibly some of the non-financial corporates.

Japanese investors should like Covid-19 bonds. While there aren’t any true social-dedicated funds in the country, investors that focus on socially responsible investing like social bonds. Even mainstream investors, driven by the sense of emergency, should want to buy the bonds, says Olszowka. “Everyone is affected by Covid-19. Companies and individuals are eager to do their part to fight the virus,” he says.

Japanese investors already have a strong understanding of ESG.

Dominique Duval, head of sus-tainable banking for Asia Pacific at Crédit Agricole in Hong Kong, says that Japan is the only market in Asia where she can split her time even-ly speaking to issuers and investors, because Japan has a much more active ESG investor base than other countries in Asia.

Her colleague, Ben Lamberg, glob-al head of MTNs and private place-ments and head of credit syndicate trading and sales for Asia Pacific at the French bank, thinks Japan is leading the way. “Japanese institu-tional investors are really setting the tone for Asia,” he says, pointing out

that the SRI investor base in the rest of Asia tends to be global asset man-agers and banks, rather than regional or domestic firms.

“We need more Asia-based inves-tors to follow Japan,” he adds. “Not just global shops deploying SRI poli-cy to their Hong Kong, Singapore or Tokyo offices. We really need Asian-centric investors to get engaged.”

The strength of the investor base has an obvious benefit: it makes it much easier to engage issuers when you can point to a clear source of demand. Japanese issuers have taken notice. This is true across the SRI bond market, although it still appears strongest in green bonds.

Orix, a Japanese financial services group, offers one example. The com-pany sold its first yen-denominat-ed green bond this year, raising the money to finance solar power gen-eration projects. A source at the com-pany said it opted for yen because, when it weighed up the demand among investors for green bonds, it

Japan’s socially responsible investment (SRI) market has blossomed, helping the country to become a leading destination for the sector. Morgan Davis reports.

Japanese investors nurture domestic SRI market

“Japanese institutional

investors are really setting the tone

for Asia”

Ben Lamberg, Crédit Agricole

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4 | May 2020 | Japan in the Capital Markets

SRI

saw that local investor knowledge had grown considerably.

“Although currently green inves-tors in Japan are limited to only some health insurance companies, local banks, education institutions and so on, the [understanding] of ESG has certainly [improved],” says the source at Orix.

Bankers say that Japan’s accept-ance of social responsibility is partly cultural. In Japan, individuals feel social and corporate responsibility is their problem as much, if not more so, than the government’s, says Shi-mamoto. That attitude has led some companies to embrace SRI initiatives as well because it can improve the appeal of their brand, he adds.

“One of the key themes that brought the institutional investor base to the SRI market is the social element,” agrees Duval. She sees the social benefits, encompassing every-thing from gender equality and edu-cation to SME financing and employ-ment, as more prevalent in Japan that other parts of Asia.

Japan’s Government Pension Investment Fund (GPIF), the largest retirement savings pool in the world, has been at the forefront of investor demand. “GPIF has come out with very strong statements in the last 18 months in support of the SRI mar-ket,” says Lamberg.

GPIF requires all its asset manag-ers to integrate ESG into investment analysis and decision making. In the first quarter of 2020, it announced initiatives with the Netherland’s BNG Bank, Sweden’s Kommuninvest, German development bank KfW and the Inter-American Development Bank to promote green, social and sustainability bonds.

But while Japanese investors are eagerly adopting SRI principles, it is still early, says Masato Takebayashi, lead analyst for Asia Pacific research at Sustainalytics. “Japanese social bond investors are still learning,” he says. “Japanese green bond issuers were able to learn from the issuers in other advanced markets… but social issues are regional and culturally specific, and the definition of target population can vary depending on local contexts.”

This is one of the reasons that find-ing a use of proceeds for social bonds can be more difficult than for a green bond, says Takebayashi.

Steady growth is probably best for the market, he says. He points to a rising fear among green bond bank-ers: “green washing”, a term for deals that on the surface go towards fund-ing projects that have some posi-tive benefits for the environment but that, in practice, often fall short.

“A too rapid expansion of the ESG market without investors’ appropri-ate understanding on ESG can be a result of ‘green washing’,” he says.

DiversificationFor some, the value of SRI bonds lies in the diversification that they offer. While the dollar remains the favourite foreign currency for Japa-nese companies, the euro market has also increasingly attracted bor-rowers as a diversification play.

The euro market is an opportu-nity to test out new sustainable investing frameworks, says Naka Okuda, co-head of DCM, capi-tal markets origination, Citigroup Global Markets Japan. This allows issuers to “do something good”, while attracting new investors, even if at a slightly less attractive price than a dollar bond, he says.

“Many companies are looking at ESG frameworks that could be a good trigger to tap the euro market for the first time,” says Okuda. “They believe the ESG framework is very popular with euro investors compared to dol-lar investors.”

Likewise, Japanese investors seek-ing diversification are looking to the international bond market, and strongly considering SRI options, says Shimamoto. “Many investors need to diversify their investment products. The ESG and SRI products help not only in [supporting a com-pany’s ethical] branding, but also with the diversification,” he says.

While the social bond market plays a key role in the Japanese bond mar-ket, green bonds make up an even larger portion of the market. In 2019, $6.8bn worth of green bonds were sold by Japanese issuers, according to Dealogic. That’s up from $4.07bn in 2018, $2.3bn in 2017 and $596m in 2016, according to Dealogic.

Sean Kidney, chief executive of the Climate Bonds Initiative, says that he is consistently meeting more inves-tors to discuss green bonds, includ-ing insurers, pension funds and bank treasuries. More people have

become interested in green funding as climate change has come into the global spotlight. As an island nation, Japan deals with risks like typhoons head-on, something that costs lives, damages property and pummels the economy. Investors like insur-ance companies will face direct risks because of that, and are incentivised to look at green investments.

Kidney expects more green bond issuance from utility companies this year. As a sector, Japan’s utilities are still figuring out how they can employ green bonds, but as many of

the companies are adopting renewa-ble energy as part of their wider busi-ness strategy, they will lean more towards raising green funds.

The government may soon be a green issuer itself. “The Japa-nese government has a reasonably aggressive green economy strategy,” says Kidney. He expects that Japan will keep a close eye on Germany’s planned green bond sale, due out in the second half of 2020. He is cau-tiously optimistic that a successful deal from Germany could encourage Japan to follow suit.

Despit the enthusiasm for SRI offers in Japan, the market is still small. Market participants agree that more education is still needed, and many investors are yet to understand the long term benefits of SRI. Issuers are also still figuring out what counts as a green or social use of proceeds, and what will be accepted by inves-tors, especially outside Japan.

“There is lots of potential in Japan,” says Shimamoto. “Japanese culture respects the sustainability of the environment historically, and Japanese investors need to diversify.”

That combination should be the perfect recipe for growth. “In the future, this market can be much big-ger,” he says. GC

“The Japanese government has

a reasonably aggressive green

economy strategy”

Sean Kidney, Climate Bonds

Initiative

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6 Japan in the Capital Markets

Social Bonds Roundtable

: How important are social bonds for Japanese issuers at the moment? What needs to be done to move this market forward?

Kazuyuki Aihara, Nomura: In 2019, the social bond market grew a lot in Japan. There was about ¥1,410bn ($13bn) of issuance in Japan’s domestic SRI market last year, but around ¥460bn of that came from social bonds. The green bond market has grown rapidly by receiving a lot of attention, including subsidies, but the social bond market has grown without any help.

2019 was a landmark year for this market. Issuers clearly see the value in using social bonds as part of their wider funding plan but, just as importantly, investors are really starting to welcome these deals. Since the emergence of the UN’s Sustainable Development Goals (SDGs), and the wider rise of ESG, investors now have a much deeper understanding of social bonds. Investor awareness has been improving for the past two or three years and it’s starting to make a big difference now.

Shin Kasahara, Nomura: Investors actually understand social bonds more than they do green bonds, because in some ways social bonds are simpler.

Participants in the roundtable were:Kazuyuki Aihara, head of ESG products, debt capital markets department, Nomura

Shin Kasahara, executive director, international debt syndicate, Nomura

Naoki Kitamura, chief financial officer, Miraca Holdings

Yasuhiro Matsui, director general, treasury department, Development Bank of Japan (DBJ)

Masato Takebayashi, associate director, Asia Pacific research, Sustainalytics

Hajime Taniguchi, director, capital markets division, Japan International Cooperation Agency (JICA)

Maki Yasui, senior financial officer, treasury, International Finance Corporation (IFC)

Moderator: Matthew Thomas, Asia bureau chief, GlobalCapital Asia

Social bonds: Japan leads from the front

The market for bonds that target environmental, social and governance (ESG) concerns previously put the focus on the environmental aspect, leading to a rush of green bond issuance but little attention on social problems. Not anymore. Social bonds have become a much more prominent tool for highly-rated issuers, helping fund solutions to problems ranging from educational shortfalls in developing countries to the spread of Covid-19 around the world. Japanese issuers have been at the forefront, developing a busy domestic market. GlobalCapital talks to a group of prominent issuers about the potential of social bonds.

Shin Kasahara, Nomura

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Japan in the Capital Markets 7

It’s always tough to compare investors in different markets but in some ways it is clear that Japanese investors already have a better understanding of social bonds than a lot of investors overseas. There is plenty of room for improvement. We still need to work hard to educate them on the wider social and sustainable bond market. But it’s been a great start.

Hajime Taniguchi, JICA: Since 2016, JICA has been issuing social bonds and we will continue to issue these bonds in the future. These bonds make sense with our mission to foster closer ties between Japan and other countries through cooperation, leading to socio-economic development. But we can see that they are becoming a much more important part of the wider market, too. Banks and corporations are starting to see value in social bond issuance now.

We have worked hard to make investors understand our social bond issuance and, at this point, we think our deals are highly valued by investors. But in order to expand the social bond market all issuers need to keep making the argument for this market — that’s the only way we move forward.

Yasuhiro Matsui, DBJ: Since 2015, we have been issuing sustainability bonds. These bonds are a kind of bridge between green bonds and social bonds: they are used to fund projects that have a positive impact for the environment and for wider society.

I agree that the main factor is raising investor awareness, although since much of our issuance is in the overseas market we are mainly talking to international investors. It’s hard work, but it is worth doing for all issuers and it’s especially important for us.

Some businesses we lend to, including those aimed at senior citizens, are not really well understood by investors overseas. But these businesses are important. There is a perception among international investors that some of the problems Japan faces — particularly the ageing population — are unique to this country. That makes it harder to convince them of the value of these projects.

Maki Yasui, IFC: IFC launched its Green Bond Program in 2010 and its Social Bond Program in 2017. Social

bonds are an important tool for raising capital for IFC projects that aim to resolve social issues and boost shared prosperity through the provision or increase of access to essential services, such as healthcare, water, and finance, for under-served populations in developing countries.

In the 2019 financial year, our green bond issuance exceeded $1.6bn and social bonds exceeded $500m. IFC’s thematic bonds account for about 20% of our total funding from the capital markets. The Japanese capital market continues to be an important source of IFC’s funding and Japanese investors have always shown a keen interest in these bonds. In FY19, the proceeds from IFC’s social bonds supported 31 different projects that benefit under-served communities across developing countries, including helping people who cannot access essential services, creating opportunities for women, investing in agribusinesses and providing healthcare and microfinance. We report on the expected impact of these projects to investors in our annual Social Bond Impact Reports.

In early March, the World Bank Group announced a $12bn fast-track finance package, which was raised to $14 billion in mid-March. IFC was set to be responsible for $6 billion of that financing, an amount that was later raised to $8 billion. On March 11, we launched a $1bn social bond which was heavily oversubscribed despite challenging market conditions.

Naoki Kitamura, Miraca: Our business is largely clinical lab testing, including testing specimens provided to us by medical institutions. We also manufacture reagents for testing and sterilise medical equipment received from hospitals. These are the three main pillars of our business.

Our company is not usually very popular in the media but because of the coronavirus, we hear our company’s name being mentioned a lot nowadays. We’re receiving a lot of specimens and conducting clinical testing including the coronavirus PCR test, so it’s obvious to people at this point that companies like us have a necessary social value. The social bond market is a perfect fit.

We started selling social bonds last year, when we

Maki Yasui International Finance Corporation (IFC)

Yasuhiro Matsui, Development Bank of Japan (DBJ)




were still relatively unknown. But even then we got a strong response from investors. The point is not just to make investors understand the credit of the company, although that is important, but also to make them understand the social importance of the business. Social bonds are a very good means of financing for companies like us.

Masato Takebayashi, Sustainalytics: We have already accumulated a lot of experience as a second-party opinion provider in the green bond market. We have noticed that the market is now expanding its attention to social bonds and I think Japan is ripe now for it.

There are some challenges. The outputs generated by environmental projects are, in general, relatively easy to monitor with quantified indicators, which is why green bonds are the ones that are likely to get more demand from the investors who value transparency and accountability. Projects that do not generate this kind of output data are going to be harder. That is the case with a lot of projects financed by social bonds.

There are challenges typical to projects designed to address social issues. What is the target population of social projects? How do we form a project that is aimed adequately at the target population but at the same time is structured in such a way that it makes sense for social bonds? That’s something we have to think about.

In addition: this is an advanced economy. Emerging countries have obvious social challenges that can be addressed with projects that ultimately have both social and economic impacts at scale. But it’s not always so simple in advanced economies. What sort of social issues in advanced economies should be regarded as eligible for social bond financing? The obvious social issue here is the ageing society, but this can be considered less crucial than the issues in developing countries and therefore money flow around the solution is not simple.

Aihara, Nomura: It is true that social bonds are often focused on emerging economies, but in the future Japan also needs to focus not just on the environment but also the social challenges that we face. What is

really hindering sustainable growth in Japan? That’s what we have to focus on. The United Nations’ Social Development Goals offer a very broad target for us and social is a very important theme.

The concept of social bonds needs to become broader. The problem of Japan’s ageing society is clearly something difficult for governments to solve, let alone for bond issuers. How can issuers make a difference in this regard? It’s a challenging question, but I think it’s one you will see more and more issuers attempt to answer in the future.

: What are the biggest hurdles to the development of the social bond market in Japan?

Aihara, Nomura: The biggest hurdle is that the number of social projects is limited. But people are finding solutions to this problem. Look at how this market started: it was originally just a green bond market. People realised that ESG bonds could be used to solve many more problems, so you saw broader sustainability-linked bonds and then social bonds. This is a market that encourages issuers, investors and governments to find solutions.

There is a more immediate problem: we need more investors. The SRI market in Japan is not so big. Life insurance companies and investment advisory companies can analyse these bonds by themselves but regional investors, for example, are not equipped to evaluate these deals on their own.

That is why companies like Sustainalytics and other external review providers are crucial. It’s important to support investors with external reviews when they evaluate projects.

Kasahara, Nomura: I agree. We have to expand the number of investors who can invest in social bonds and green bonds. It is not just small regional banks but religious organisations as well. The amount of money may be small in each case, but they want to invest in these themes and collectively, these smaller organisations can make up a sizeable part of the investor base.

Taniguchi, JICA: There seem to be many

Naoki Kitamura Miraca Holdings

Kazuyuki Aihara Nomura




hurdles. As an issuer, we want to continue to issue social bonds. But is there any advantage to issuing social bonds for corporations? Will there be a different investor base or a pricing advantage? These are the important questions that are going to determine the growth of this market. We will continue to issue social bonds because they’re a perfect fit for us but to become popular among corporate bond issuers, there need to be clear advantages.

Matsui, DBJ: It’s important that your bonds can be easily understood. The use of proceeds of our bonds, and the projects we are focused on, need to be very clear to investors. That is the ideal, at least. It can sometimes be difficult to explain these projects in reality but sustainability is such an important issue that all borrowers need to work hard to communicate clearly with investors.

Social and sustainable bonds sometimes rely on qualitative explanations. But the key for investors is allowing them to easily do quantitative analysis. The challenge for sustainability and social bonds is that this is not always easy. Borrowers tell us it is difficult to disclose all of the information that bond investors might want, and on the schedule they want it. Sometimes they don’t even want us to disclose their name.

The entire market needs to work towards a better understanding of the importance of disclosure. The more we can tell investors about the projects we’re working on, the better. It’s difficult to predict how fast this is going to change but it will change at some point. As investors commit more capital to this market, our clients will understand how important it is to offer clear, quantitative data.

Yasui, IFC: It is key that issuers have a transparent framework for issuing thematic bonds in place that aligns with the Green Bond Principles, Social Bond Principles and/or the Sustainability Bond Guidelines as published by the International Capital Markets Association. Additionally, issuers should have an internal process in place and publish an annual impact report on the use of bond proceeds.

IFC publishes a Green Bond Impact Report in the

fall and a Social Bond Impact Report in the spring, following its fiscal year end. These reports present a list of projects that were committed that fiscal year and eligible to be financed with green or social bond proceeds, alongside expected impact numbers. The impact reports are prepared by IFC’s funding and investor relations team and require intensive collaboration with other teams at IFC, such as inclusive business and climate business experts. We always welcome feedback from investors on what data points they would like to see in our impact reports.

Similar to the manner in which climate change became a topical issue and a call to action worldwide, which then led to the growth of the green bond market, the current pandemic and its effect on public health and the global macro and political spheres may very well increase the awareness of social bonds. With no additional risk besides that of the issuer, social bonds offer investors the ability to support social issues, including those emanating from Covid-19.

Kitamura, Miraca: Major investors, including asset management companies and life insurance companies, bought our bonds. We got a very good reaction to our social bond issuance and we’re very satisfied by the result.

Investors did not buy this deal just because it was a social bond: they still had to consider the credit metrics and weigh up pricing and maturities. But the fact that it had the social label generated a lot of interest for investors. It makes a lot of sense of issuers — the deal still needs to be attractive for investors, but they’re more likely to consider it if it’s a social bond.

Takebayashi, Sustainalytics: I want to highlight one hurdle to the global development of a social bond market: ‘social’ means something different in each society. It may be considered a catch-all term, in the sense that these bonds always fund social projects. But is there a meaningful similarity between social projects to alleviate poverty, for instance, and those to reduce the impact of the ageing society? It is not obvious how investors analysing social bonds in emerging markets can apply their knowledge and their frameworks in Japan, and vice versa.

Masato Takebayashi Sustainalytics

Hajime Taniguchi, Japan International Cooperation Agency (JICA)




: The support of the Ministry of Environment was a crucial step in the development of Japan’s green bond market. How important is the government’s help in developing the social bond market? Who should take ultimate responsibility for developing this market?

Aihara, Nomura: The social bond market in Japan has been growing next to the green bond market, so in one sense the market doesn’t really need help. But when you break down the issuer base, there are very few private companies. Miraca Holdings is a notable exception. We have also seen deals from real estate investment trusts. But most issuance has come from agencies.

The Ministry of Environment is still very important for the green bond market, both because it created a framework and because it offered subsidies. It would definitely be helpful for the government to further subsidise the social bond market. But which ministry should be expected to fund this subsidy? There’s not an easy answer to that question.

Takebayashi, Sustainalytics: I agree with Aihara-san. The government has provided incentives and support for the green bond market and that is a major reason why the market has gone well. The subsidies are crucial but the MOE’s guideline is also a big help.

Each ministry has different themes, different goals, so I can’t give you a concrete answer to the question of which ministry should take the initiative for promoting social bonds. But with all the social challenges Japan faces, the government needs to be thinking about how to balance the role of the state and the private sector.

Kasahara, Nomura: I agree. I would add that the responsibility of developing the social bond market lies with all of us. Securities houses, in particular, need to focus on helping to develop the investor base.

Yasui, IFC: There is more governments can do besides offering subsidies or regulating. The role of government as an issuer may impact the market. Thematic issuances by sovereigns are seen as a benchmark for other potential issuers. National governments or local governments may issue social bonds to fund their

specific social goals in the near future.In terms of world trends, we expect thematic bond

issuance to grow in emerging markets. IFC supports the issuance of thematic bonds in emerging market currencies and the development of emerging capital markets, for example through IFC’s investments in Amundi Planet Emerging Green One Fund and Real Economy Green Investment Opportunity Fund. We would also like to support the issuance of social bonds through a dialogue with market participants.

: What role will Japan play in the development of the global social bond markets? Can it be a global hub? A regional hub?

Takebayashi, Sustainalytics: When we talk about the scale of issuance, I think Japan will be at the top. It will certainly be the hub in Asia but perhaps it will have a larger green bond market than Europe. But as I said earlier, there are totally different social challenges in different countries and there are wildly differing levels of economic development. That means the purpose of the market is going to be vastly different in each country.

Yasui, IFC: Japan will continue to be the SRI market leader, supported with a high savings rate, a large population and high interest in environmental and social issues. Through SRI bond investments, Japanese investors can learn plenty about social economic issues in other countries. Wealth is clearly and unevenly distributed in developed countries. IFC will play a leading role in flowing capital from developed countries to developing countries through social bonds.

Matsui, DBJ: We have issued both yen-denominated bonds and foreign currency bonds. Social bonds will continue to expand in the Japanese yen market, but how far can we push the value of this market? Can we be a hub? I’m not too sure about that. The social challenges first need to be understood by other countries.

We have accumulated a lot of experience talking to international investors. Investors in Europe and the US are interested in both green and social bonds. But our impression so far is that Asian investors are still not particularly interested. They do tell us that things will change, that the next generation will take things more seriously. But a lot of investors in Asia still don’t see this market as being critical.

Kasahara, Nomura: Japan is already one of the hubs of the global social bond market. Foreign issuers are already tapping Japanese funds with their bonds in the offshore market. It is clear the onshore market is developing rapidly, too.

The flow of funds in the SRI market is changing. Investors are now looking to put their money into projects that will have a big impact and, in that sense, Japanese investors can be a great source of funding for emerging economies, just as European and US investors can be a good source of demand for bonds from Japan. This is an increasingly global market and Japan has a crucial role to play. GC

Matthew Thomas GlobalCapital Asia

Participants in the roundtable were:

Moderator:


What were the key highlights of JFM’s inaugural green euro bond in February — and what were the main challenges?

There were a number of highlights to our green bond issuance. We were the first Japanese SSA issuer to allocate the green bond funds to sewerage projects in the country.

We also succeeded in diversifying our investor base, including green bond investors, and proved that a Japanese SSA issuer can get strong investor demand for a euro-denominated deal. We can now introduce local municipal projects related to Sustainable Development Goals (SDGs) to the global market.

Since this was our maiden green bond, we had to prepare thoroughly to tackle all the challenges.

This involved putting together a green bond framework, obtaining third-party opinion, preparing for impact reporting and co-ordinating with the relevant municipalities.

What are the firm’s future green/sustainable funding plans? Does JFM have a preference for any currencies?

After publishing our first green bond impact report, we would like to discuss our future funding plans for green bonds. We will take feedback from investors and the municipalities into account.

There are no specific preferences on currencies. JFM tends to select the currency each time by looking at

the funding cost, market conditions and investor demand.

JFM has put a lot of emphasis on using the funds raised for developing Japan’s sewerage system. Why is this a key focus? Are there plans to expand focus to other parts of sustainable development in the country?

The Japanese government has been promoting the sustainable growth of sewerage projects, such as preservation of water quality in public areas, taking measures against aging sewerage facilities, and preventing floods from rain water. It regards sewerage as one of the most important projects in Japan.

In addition, sewerage projects are in line with the clean water and sanitation criteria of the SDG goals.

JFM contributes to sewerage projects by offering loans to municipalities at low interest rates. The total size is about $3 billion each year, which is the largest share of JFM’s outstanding loan portfolio.

For future thematic bonds, JFM would take into account relevant feedback from investors and municipalities after we publish our first green bond impact report.

How will JFM’s green issuance help local governments become more environmentally conscious and boost their SDG related initiatives?

JFM is planning to publish a green bond impact report, which will

include details of sewerage projects and their environmental impact.

As a joint funding organization wholly owned by municipalities of Japan, JFM expects that by publishing this report, it would help promote activities run by municipalities that relate to SDGs, and would appeal to investors globally.

This would help municipalities raise awareness about the importance of taking an environmental approach to their activities.

How is JFM’s bond expected to help other Japanese financial institutions and corporations also sell similar notes in the international market? What benefits can they potentially enjoy?

The number of long-term euro bonds and green bonds issued by Japanese entities is limited, which made it difficult for Japanese issuers to find fair value for their deals.

Through the success and strong demand for JFM’s seven year €500m green bond, JFM believes it will help other Japanese issuers that are considering selling euro or green bonds by providing a fair value reference. With this, they can get strong investor demand.

April 2020 • Report

SPONSORED STATEMENT

JFM: setting a green example for Japan The Japan Finance Organization for Municipalities (JFM) has put sustainability at the top of its agenda. In this Q&A, Ueda Hirotsugu, director of finance at JFM, highlights the importance of developing the socially responsible debt market in the country.

Ueda Hirotsugu, director of finance at JFM

JFM sponsored statement.indd 3JFM sponsored statement.indd 3 05/05/2020 21:4305/05/2020 21:43

12 | May 2020 | What’s Next For Asia’s Capital Markets?

INTERNATIONAL FUNDING

The volume of Japanese bond issuance overseas has made for sobering reading over the last few years. In

2019, just $87.6bn was raised in dollar and euro bonds, down from $105bn in 2018 and $114bn in 2017, according to Dealogic. The long-run trajecto-ry of the market is still positive — in 2010, they raised just $27.5bn — but for now, volumes remain tepid.

This is unlikely to last, say debt bankers. Japanese issuers can still find cheap funding in their domes-tic market, but it is much harder for them to find new business opportu-nities. The need for Japanese compa-nies to expand overseas brings with it a need to fund in foreign currencies.

There were 826 overseas acquisi-tions by Japanese companies in 2019, according to Tokyo-based research company Recof. That demonstrates notable growth over the 778 transac-tions in 2018, and the 673 reported for 2017. SoftBank Group, the ultra-acquisitive telecommunications com-pany and venture capital investor, is the poster-child for this overseas buying spree. But more conservative companies are also making the move.

“Japan is a small island,” says Naka Okuda, co-head of debt capital mar-kets, capital markets origination at Citigroup Global Markets Japan. “More and more Japanese companies are focused on expanding their for-eign business.”

The obvious beneficiary of this push for more overseas business will be the dollar and euro bond mar-kets. Although Japanese issuers are eager to expand into southeast Asia, the paucity of funding options in that region means swapping from dollars is often the most economic approach. Low US interest rates — pushed down dramatically by the Federal Reserve’s response to the coronavirus — are another selling point.

In January, Japanese banks could

price senior dollar bonds at about 75bp-80bp over US Treasuries, and strong corporates could price around 40bp-50bp over. These attractive pricing levels have generally created even more reason to look at dollars as a feasible option.

The current volatility means off-shore investors are likely to be care-ful with how they allocate funds, but the strong credit strength of Japanese borrowers means they would be able to attract demand where other Asian corporations would falter.

“Japanese credit is a very nice product for US investors,” says Ryota Suzuki, head of Japan debt capital markets, Japan global capi-tal markets for Bank of America in Tokyo. Europeans have likewise flocked to Japanese bonds as a diver-sification play, he says.

Covid-19 impactThis all seems to paint a positive pic-ture. The numbers this year have also been strong. In line with previous years, 2020 started strongly for Japa-nese borrowers. Nearly $27bn worth of dollar bonds and more than €2.7bn of euro notes had been issued by March 30, according to Dealogic.

But like the rest of the world, Japan has been hit hard by the coronavirus. As of April 21, Japan had more than 11,000 confirmed Covid-19 cases. Bankers in Tokyo, some of whom are still venturing into their offices, note how quiet the city has been.

The country is still well-regarded by international investors, meaning a flight to quality is likely to help some Japanese issuers. Many of these issu-ers are also savvy enough to under-stand that windows of opportunity will appear, forcing them to be ready to move at short notice, say bankers.

Japanese issuers may also have a degree of good fortune from the tim-ing of their fiscal year, which starts on April 1. Issuance always tends to slow down in March and April, mean-ing the coronavirus has not under-mined a wall of expected issuance.

Citi’s Okuda expects July, August and September to be busy for inter-national funding.

“Several companies will not give up on funding in the international capi-tal markets,” says Okuda. “They’re just preparing, and watching the cap-ital markets situation.”

But there are clearly more down-sides than upsides at the moment. The full impact of the coronavirus pandemic on the global economy is still uncertain, another cause of con-cern for debt bankers. Japanese cor-porations may need to pay up even in their domestic market but bank-ers say it is the dollar market that will take the biggest knock, although they also point to the risks from waiting for the perfect window.

“It would be concerning if Japa-nese issuers potentially hold off for a longer period,” says Misawa Kishi-nami, head of DCM at UBS Japan in Tokyo. “Any slowdown of the macro economy could worsen the huge pric-ing gap between the onshore and off-shore markets.”

Even if there is a pick-up in domes-tic bond issuance over internation-al funding in the next few months, companies will still be limited by the size of the Japanese market. Any issuer seeking large trades, such as banks topping up capital levels, will still want to use dollars, says Okuda.

The road ahead remains uncertain. Although Japanese issuers see off-shore funding markets as a good way to meet financing goals and to fund overseas expansion, they may decide that the safest route is to stick closer to home. The dollar bond market will not be shunned by Japanese issu-ers but it is also unlikely to experi-ence the sharp boost in issuance that bankers hope for. At least not yet. GC

Japanese companies have reduced their offshore bond issuance over the last few years. But could a push for overseas business bolster supply? Morgan Davis reports.

Japanese issuers face uncertainty in dollars, yen

“Japanese credit is a very nice

product for US investors”

Ryota Suzuki, Bank of America

012 Int funding _Japanese issuers_s_1.indd 12012 Int funding _Japanese issuers_s_1.indd 12 05/05/2020 21:3105/05/2020 21:31

ALWAYS DEAL RESPONSIBLY

No other publication brings you as much dedicated coverage on the fastest growing areas of the capital markets.

Visit GlobalCapital’s new SRI/Green Bond section for all the latest news, Dealogic data and opinion from the world’s socially responsible capital markets.

Explore more here: www.globalcapital.com/SRI-Green-Bonds For any questions please contact: [email protected]

Untitled-2 1 22/09/2015 13:46


Top Credits Roundtable

: Let’s start by taking a look back at your funding plan over the last 12 months. The world has been gripped by uncertainty over the last year, even before the coronavirus caused huge volatility in global markets. How have you navigated this?

Yoshitaka Hidaka, JBIC: Looking back over the past 12 months, the bond market has been highly volatile due to risk events such as the US-China trade talks, Brexit and the situation in the Middle East — this was all before the coronavirus. Against this backdrop, JBIC successfully completed three benchmark sized bond issues with several tenors in May and October 2019 and in January 2020, worth a total issue size of $7.75bn.

When deciding the timing, amount, and maturity of our bond issuance, we essentially take into account our asset-liability management needs and the trend of the market at the time of issuance. The goal is simple: we want to make it easy for investors to buy our bonds. Last year, by paying more attention to these points, particularly being flexible on the type of bonds we issued, we were able to achieve significant oversubscription in all bond issues, even in difficult market environments. In particular, the total order book for our three-year notes in January this year was the highest ever for us, with approximately $85bn of demand.

Ryo Saeki, TMG: TMG raised $1bn from foreign bonds in May 2019. Due to remarks by US president Donald Trump about additional tariffs on China just before the deal launched, the execution was carried out under dete-riorating market conditions. However, it was successfully issued as planned. Although the market was highly vola-tile, we believe that our careful judgement about the tim-ing of the issuance led to a smooth and successful deal.

Kosuke Ito, DBJ: In 2019, we issued international bonds through two public offerings, one of which was a dollar-denominated five and 10 year dual-tranche government guaranteed bond; the other was a dollar-denominated five year sustainability bond, which did not have a gov-ernment guarantee.

Fortunately, we did not have to change the timing of our funding for these two bonds, but the market condi-tions on both occasions were difficult. The first deal faced a problem with a flat yield curve, which meant there was almost an absence of 10 year bonds before we opened the books; the second deal was threatened by volatility caused by the US-China trade war.

We managed to get these deals done with strong sup-port from our lead managers. We were very careful about where to start initial price talk, and about how to manage the bookbuilding process.

That helped us tighten pricing during bookbuilding. We were able to complete our funding plan with strong support from quality investors, including central banks and dedicated SRI investors. The subsequent secondary market tightening of these bonds was a welcome conse-quence of our careful approach.

Hirotsugu Ueda, JFM: JFM usually issues two non-Japa-nese yen benchmark bonds around April and September each fiscal year. But since there were many volatile events expected in fiscal 2019, we decided to do pre-funding for the first time. We issued in March, right at the end of the 2018 fiscal year, instead of our usual issu-ance at the end of April. This proved a wise decision.

We were able to enjoy favourable market momentum in March and get strong demand from investors. In February 2020, the market was volatile due to the rising tensions in the Middle East and the spread of the coro-navirus, but we managed to issue our first green bond at a fair value. We held a roadshow before the deal to pitch investors, but we also went back and checked with them on their level of demand afterwards.

: Japanese borrowers can perhaps be expected to benefit from global uncertainty, given the country’s high-standing among international investors. Have you experienced that?

Participants in the roundtable were:Yoshitaka Hidaka, director, capital markets and funding division, Japan Bank for International Cooperation (JBIC)

Kosuke Ito, director, division of financing, treasury depart-ment, Development Bank of Japan (DBJ)

Ryo Saeki, director, bond section, budget division, bureau of finance, Tokyo Metropolitan Government (TMG)

Hirotsugu Ueda, director of finance, finance department, Japan Finance Organization for Municipalities (JFM)

Tatsuya Yasuda, head of international DCM, Nomura

Moderator: Matthew Thomas, Asia bureau chief, GlobalCapital

Japan’s top credits: navigating volatility Japanese issuers are among the best-regarded in the world, offering global investors a safe haven at times of heightened volatility. That is now more important than ever. Their last financial year started amid widespread trade disputes between China and the US. It ended with the global spread of Covid-19, a pandemic that threatens to fundamentally alter the capital markets. GlobalCapital talked to a group of Japan’s top issuers to find out how they have navigated the volatility — and what they’re planning next.

Yoshitaka Hidaka, Japan Bank for International Cooperation (JBIC)

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Tatsuya Yasuda, Nomura: Yes, I believe Japanese bor-rowers have enjoyed benefits from the global uncertainty as Japanese credits attract global investors who seek risk-averse assets, diversified investment opportunities and higher returns.

Japanese issuers have grad-ually strengthened their rela-tionships with SSA investors for a few reasons. First, Japan is a unique developed coun-try which has maintained a good relationship with both the US and China, thus mak-ing it less vulnerable to trade and geopolitical issues.

Second, in terms of geo-graphical diversification for investors, Japan is a clear choice. It is one of the best sovereign names in Asia and boasts ample liquidity among SSA credits. Finally, in terms of its rating, Japan is lower than other major developed countries, thus we can expect relative value.

There have been new investors, particularly central banks and supranationals, who like the increased liquidity of high-grade Japanese SSA bonds. There has also been a rise in demand from banks and asset managers who have been looking to deploy their abundant cash holdings.

Saeki, TMG: When we sold US dollar bonds last year, we were able to strengthen our investor base, with participa-tion from central banks and public institutions increasing to about 50%.

We believe this was primarily owing to the high quality credit of TMG, as well as our continuous dialogue with foreign investors through roadshows, but it may have also been contributed to by the increased preference for Japanese names in an environment of higher uncertainty.

Ito, DBJ: Japanese govern-ment bonds are rated A1 and A+ by Moody’s and S&P, respectively, which are lower ratings than other major OECD countries including the US, the UK, Canada, France and Germany. As a result, Japanese SSAs, including us, pay an additional spread for international bond issuance compared to higher-rated SSAs such as KfW and EIB.

But this also means interna-tional bonds from Japanese SSAs can be very attractive to international investors, who may feel that Japanese SSA bonds provide better relative value on a risk-adjusted basis, given the substantial, sound credibility of Japan as a country compared to its credit rating. We think DBJ can grow its investor base partially by welcoming investors with this kind of strategy.

Ueda, JFM: JFM consistently issues benchmark bonds every year and regularly meets investors, so we believe investors have enough understanding about our credit.

We have been able to issue benchmark-sized bonds in tough market conditions. We have heard from investors that Japanese names pay attractive spreads compared to AAA rated EMEA agencies and supras, even though we

are highly valued in terms of credit. We also saw new investors opening credit lines for Japanese names last year. JFM recently issued a green bond in euros for the first time in more than five years. We have managed to diversify our investor base, with new green bond inves-tors and European investors participating in our deal.

Hidaka, JBIC: Since taking my position at JBIC in August 2019, I have met with investors across the globe to hear their views and there are strong needs among them to include Asian assets in their portfolios.

Among the Asian credits, Japan is seen as special. We are also benefiting from a global reduction in interest rates as some investors have looked for higher return products amongst SSAs. In fact we saw new central banks coming into our deals last year.

With this in mind, we have started discussions with some central banks and official institutions to further expand our investor base.

: The US dollar market is clearly the most important offshore funding market for Japanese bor-rowers. But do you have plans to issue in non-US dol-lar currencies, including euros?

Saeki, TMG: TMG swaps all of the funds we raise in foreign currencies into yen to hedge the risk and to use the money to cover our expenditure. Although US dollar-denominated bonds have been more competitively-priced than euro-denominated bonds, we recognise that the dif-ference is shrinking and no longer as significant as before. Therefore, euro-denominated bonds could also be a strong candidate, depending on future market conditions.

Ito, DBJ: We recognise that some issuers choose a market or a currency based on the market at the time of their bond issuance, allowing them to get the best possible cost of fund raising. But our primary focus when issuing international bonds is not the cost — we raise capital in a particular currency to meet our needs in that currency.

As our international activity expands in terms of the markets or regions we cover, we face needs to raise capi-tal in various currencies. We currently have exposure to various currencies including Japanese yen, US dollars, euros and sterling. Therefore, we are now considering issuing international bonds not only in dollars, but also in euros and sterling.

Ueda, JFM: JFM looks at funding costs, asset-liability management and investor demand when issuing bench-mark non-Japanese yen bonds and the euro has been one of our options. We issued our green bond in euros recently and will continue to issue in non-yen currencies, including euros — as long as the deal makes sense.

Hidaka, JBIC: For the past few years, JBIC has not issued in euros or other foreign currency denominated bonds but the US dollar. Our strategy is to keep a long-term rela-tionship with existing investors by maintaining our posi-tion as a frequent issuer of US dollar benchmark bonds.

That does not mean we will rule out issuing bonds in other currencies, including euros. If we have euro fund-ing needs, or we see a funding arbitrage by raising euros and swapping to dollars, we will be active in this market.

Yasuda, Nomura: The euro market could be an option for Japanese issuers in light of cost. Nomura has often observed that the issuance cost of euro bonds is com-petitive to that of the US dollar, due to a tightening of spreads as a result of the ECB’s bond-buying, as well

Tatsuya Yasuda, Nomura

Kosuke Ito, Develop-ment Bank of Japan (DBJ)




as the movement of the basis swap. The euro market is also starting to make more sense for Japanese issuers. Given their current overseas business expansion and the need for diversified financing, the euro market is quickly becoming a more attractive funding option. On the other hand, the sterling and Australian dollar markets are also an option, although they do tend to be more costly.

: What are the main concerns that interna-tional investors express about the Japanese economy when you meet them? How do you address these concerns?

Yasuda, Nomura: Despite the high debt-to-GDP ratio, Japan’s economy is well managed. Few international investors have big concerns over the Japanese economy at the moment. One of the largest risks, I think, is that major rating agencies may downgrade Japan’s sovereign rating as a result of the high debt level.

That would have an impact on demand. Japan should continue to discuss policies to control expenditure for the ageing society, as well as to enhance the discipline of fis-cal policy. By the way, there is an increasing concern that we might see such likelihood more if further government spending materialises as a counter-measure to the eco-nomic downturn due to Covid-19.

Ito, DBJ: Each investor has their own concerns, some of which are shared with the majority, but some of which are unique. We think many investors are interested in how the Japanese government will manage risks associ-ated with its huge amount of debt, ageing and shrinking population, and seemingly unsustainable pension system.

What we can do for these investors is provide the best available information from the public, our lead manag-ers and our internal resources, including the knowledge and information coming from our economic & industrial research department.

Saeki, TMG: When it comes to the Japanese economy as a whole, international investors often show interest in issues such as the impact of last year’s consumption tax hike, the ageing of society and the declining birthrate in Japan.

While not all of these can be addressed solely by TMG, we have helped investors under-stand what Tokyo is doing to alleviate the declining birth-rate, for example.

Hidaka, JBIC: Today, a shrink-ing, ageing population is a serious and common challenge for most developed countries. To cope with this chal-lenge, it is necessary to expand the social system to make it easier for married couples to have and raise children, while still allowing them to continue their work. The tra-ditional view of the labour market in Japan is changing.

: What is your view on the Bank of Japan’s negative interest rate policy? If the negative interest rate policy came to an end, how would that affect your funding plans?

Yasuda, Nomura: It is a standard of monetary policy to keep the policy rate low when the economy is not in

good shape. Given that principle, and Japan’s current eco-nomic situation, we can say the negative interest policy is justified to some extent.

Even if the negative interest policy ends, we believe there would be no serious impact on financing as long as the quantitative monetary easing continues, which keeps a good balance between supply and demand in the mar-ket on the back of abundant market liquidity.

On the other hand, if both the negative interest policy and quantitative monetary easing policies come to an end, the market would then be considered to be recov-ered enough for investors to invest in risk assets more actively. That would provide issuers with a variety of options for financing. The end of the policy would be a sign that the economy is turning a corner.

Saeki, TMG: Shortly after the introduction of the nega-tive interest rate policy by the Bank of Japan, a few things changed in local government bond markets, including the implementation of an absolute yield pricing method for bonds, rather than a spread-pricing method.

But regardless of the interest rate policy, TMG has con-tinued to issue domestic bonds with an emphasis on rais-ing funds through public offerings based on the monthly 10 year bond issues. Even if the negative interest rate policy ends, we do not expect any particular impact on TMG’s bond issue operations.

Ito, DBJ: The Bank of Japan’s negative interest rate policy has affected our bond investors’ activities and strategies, and the degree of that effect becomes more significant as time goes by. This policy created a demand among some investors to buy ‘safe’ bonds instead of keeping capital in deposits. It also created investor demand for alternatives to JGBs, which offer negative or very low yields.

This policy has also changed some investors’ maturity preferences, as well as their approach to factors such as credit risk, collateral conditions and risk-weighting. As a result, our investor base for each maturity product has experienced changes and it looks like this trend will con-tinue as the Bank of Japan keeps the negative interest rate policy in place.

If the Bank of Japan altered this policy, the above chang-es would reverse, and as a result our investor base would change dramatically again. If that happens, we need to be careful and prudent to appropriately adapt to that change, and to modify our funding plans accordingly. That means everything: pricing, maturity allocation, and size.

Ueda, JFM: BoJ’s negative interest rate policy enabled JFM to fund at lower levels. The impact on the primary bond market is that investors such as life insurance compa-nies have decided to invest in longer dated bonds to hunt for more yield. In the domes-tic Japanese yen market last year, due to the further decrease in yen rates, JFM‘s bonds received very strong demand from investors due to the spread from JGBs.

We managed to issue at the same spread levels as municipalities in Japan.

If this negative interest rate policy ends, we are not expecting a drastic change in our funding plans, although we expect funding and lend-ing levels to change some-what. GC

Hirotsugu Ueda, Japan Finance Organization for Municipalities (JFM )

Ryo Saeki, Tokyo Metropolitan Government (TMG)


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