Macquarie success boosts Japan's Pro-bond market

By Frances Yoon

HONG KONG, March 16 (IFR) - Macquarie Bank has become the first Australian issuer to sell Pro bonds in Japan in a tightly priced offering, which raises hopes that the format is gaining traction.

The offfering involved two tranches, totalling ¥34.1bn (US$280m), with a ¥3.2bn three-year bond priced to yield 13bp over yen offer-side swaps and a ¥30.9bn five-year to yield 25bp over swaps. The coupons for the two tranches are 0.353% and 0.563%, respectively.

The size was larger than bankers away from the issuance had expected, mostly due to support from strategic investors, such as the Development Bank of Japan, as well as other major Samurai investors like city banks.

The meagre spreads for A2/A/A rated Macquarie also adds to the appeal of the Pro bond format. Bankers said the bonds priced in line with the traditional Samurai market, despite the far-less onerous documentation requirements.

Pro bonds are faster to issue than Samurai because foreign issuers can sell them off an existing debt programme by simply registering it with the Tokyo Stock Exchange. This step lets issuers circumvent a lengthier process of having to translate their documents into Japanese, which is required for Samurais.

"That combination of ease of use and documentation, plus the size, was more in sync with their funding programme," said a banker close to the deal.

The lack of Samurais from Australian lenders this year had also helped whet Japanese appetite for Macquarie's bonds, said bankers.

The participation of major Japanese investors suggests the Pro bond format is gaining favour as Japan's monetary policies force conservative fund managers to look beyond local government bonds for higher returns.

It is reminding potential issuers of the advantages of selling Pro bonds, which have failed to gain traction since the product's inception seven years ago.

It took Macquarie about three weeks to register its US$25bn debt-issuance programme on the Tokyo Stock Exchange on March 2. If would have had to wait at least two months longer if it wanted to do a Samurai. Citigroup and SMBC Nikko were lead managers on Macquarie's Pro bond offering.

The banker added that he was getting more calls from debut yen issuers about the possibility of issuing Pro bonds. He estimated that at least ¥100bn in Pro bonds could be sold in the coming fiscal year.

Another banker away from the deal said he was actively pitching Pro bonds to clients. "I'm expecting about 10%-15% of yen issuance this year to come from the Pro bond market," said the banker. "This is quite a difference from previous years. If you asked me to do Pro bonds a few years ago, I'd say you're crazy."

Only three issuers have sold Pro bonds in the current fiscal year to March 31. Banco Santander Chile did a ¥27.3bn three-tranche issue last April, while Malayan Banking (Maybank) priced two deals in May and August - a ¥31.3bn three-year and then a ¥20bn five-year bond to yield 27bp over swaps - and First Gulf Bank issued a ¥10bn 5-year at 0.863% last June.

Not so fast

While Macquarie was looking at a moderate size for its debut offering, bankers said the Samurai markets would be more appropriate for larger deals.

"There still is the Achilles' heel of the Pro bond format, which is that the big bond indices in Japan - notably, the Nomura BPI Index - still do not include them," said the banker. "That is the reason why we don't get much sponsorship from some of the asset managers and insurance companies."

Most of the major global issuers had also established Samurai programmes, he added.

"As most of the systemically important banks have Samurai shelves, they're going to be very hard to persuade to do Pro bonds," he said. "Your next tier of smaller regional banks haven't done Samurai before and, thus, could potentially be persuaded."

Macquarie's issue also showed there is little difference in price between the Pro bond and Samurai format.

Bankers said a new US dollar-denominated five-year bond from Macquarie would come at around 15bp over yen Libor, considering that the Australian issuer's US$750m 2.4% January 2020s were trading at Z+75bp, and a new deal would need a 10bp new-issue premium.

That would mean Macquarie's Pro bond priced around 10bp wide to a new US dollar deal - relatively in line with previous Samurai issues.

For example, Double A rated Aussie lenders, such as National Australia Bank, priced a five-year Samurai at 1bp over swaps in January. Adding the 25bp spread between Macquarie and the major banks in US dollars brings a new yen-dominated Macquarie bond near the 25bp area over yen Libor.

A banker off the deal argued that Macquarie might have paid a higher premium of around 23bp, since final pricing on the five-year Pro bond translated to Z+98bp, but that would be attributable due to investor demand rather than because of the related format.

While the Pro bond pipeline has grown, smaller banks are more susceptible to market risks.

Austrian lender HYPO NOE Gruppe Bank has decided to delay investor discussions for a Pro bond until at least next week amid reports of the ongoing restructuring of Austrian lender Hypo Alpe-Adria Bank International.

The deal is still expected to materialise around April. HYPO NOE registered its programme on the TSE on February 18 via BNP Paribas and Barclays. (Reporting By Frances Yoon, editing by Dharsan Singh, Steve Garton and Daniel Stanton)