A 0.99% Bond in Japan Is Redefining What High Yield Means

(Bloomberg) -- Japan’s negative interest rates have upended many conventions in the local credit market and another was broken on Friday when the nation’s first publicly offered junk bond priced -- at the super-low interest rate of 0.99%.

Aiful Corp., a consumer lender that teetered on the edge of bankruptcy a decade ago, sold 15 billion yen ($138 million) of speculative-grade notes due in 1.5 years. The coupon is the lowest for any outstanding junk fixed-rate note in the world, according to data compiled by Bloomberg, and pales in comparison with rates above 10% on some dollar securities sold by Chinese issuers this year.

One percent on a junk bond may be unthinkable in other debt markets, but by Japanese standards it looks pretty good. Two-year local government debt yields are at about minus 0.17%, and a 50-year yen corporate bond priced this year at a little over 1%.

The landmark Aiful offering is the exception that proves the rule in Japan, where companies haven’t felt compelled to sell speculative-grade notes as they’ve traditionally found it easy to obtain bank loans. But some recent changes have at least raised the possibility that the country could eventually develop such a market. State-run Government Pension Investment Fund, which manages the world’s largest such pool of assets, revised guidelines last year to allow it to buy yen bonds with ratings of BB or lower.

BOJ Effect

The milestone of a junk note in Japan is a welcome “byproduct” of the Bank of Japan’s negative-interest rate policy which has spurred more risk taking by investors, but there is a long way to go before the nation has a functioning high-yield market, according to Toshiyasu Ohashi, Daiwa Securities Group Inc.

While many Japanese investors will welcome any extra yield, some that can buy higher-paying overseas notes will find a coupon of about 1% to still be too little.

The calculus could be different for certain other Japanese investors like smaller banks that can’t make money buying government bonds with negative yields and so must find alternatives.

Lenders are awash with deposits, and desperate for investment options as their profitability gets squeezed. The difference between bank deposits and loans at Japanese banks known as the yotai gap, widened to a record 256.6 trillion yen at the end of April, according to data BOJ data.

Aiful’s bond got more than 30 billion yen in orders, and investors in the deal totaled about 30, a relatively large number for such a small offering, according to information from an underwriter on the transaction. Buyers of the bond, rated BB by Japan Credit Rating Agency, included banks and asset managers.

Coupon data are based on company bonds currently rated speculative that didn’t have investment grades when issued.

To contact the reporters on this story: Issei Hazama in Tokyo at ihazama@bloomberg.net;Finbarr Flynn in Tokyo at fflynn3@bloomberg.net

To contact the editors responsible for this story: Andrew Monahan at amonahan@bloomberg.net, Finbarr Flynn

©2019 Bloomberg L.P.