Shady Japan Bond Sale Practice Returning as Yields Fall
Shady Japan Bond Sale Practice May Be Returning as Yields Fall
(Bloomberg) -- A shady practice in Japan’s corporate bond market may be on the rise again as falling yields make investors pickier, leading to more bankers saying that debt sales were successful when they actually weren’t.
Underwriters failed to fully sell at least 20 company-note issues out of 91 in July, or 22% of the total, according to information compiled by Bloomberg based on more than 100 interviews with investors, underwriters and issuers. While the ratio has only increased for two straight months, it’s more than tripled from the low of 6% in May.
Japanese financial regulators started to probe underwriting practices in the nation’s corporate bond market last year after Bloomberg reported that bankers often falsely say debt deals sold out, to cover up a lack of demand. The practice appeared to decrease from the start of the year. But unsold notes seem to be rebounding as an expansion of monetary stimulus globally sparks a jump in Japanese bond sales, making it harder for underwriters to ensure that there’s enough demand for each deal.
“This phenomena is evidence that communication between investors and issuers doesn’t always go well,” said Takahiro Oashi, a senior fund manager at Asahi Life Asset Management in Tokyo. He said that unsold bonds are a deep-rooted problem in Japan and that investors are often left in the dark about them.
In July alone, bonds of companies including Nippon Life Insurance Co., Credit Saison Co., Seiko Epson Corp. and Chugoku Electric Power Co. went unsold, according to people familiar with the matter who asked not to be identified discussing a sensitive topic.
And it wasn’t only Japanese corporate debt that failed to sell out. A three-year Samurai note issued by South Korea’s KT Corp. didn’t either, people familiar with the matter said. Spokespeople for all those companies said that’s not what they were told by their bankers.
Japanese companies have issued 6.2 trillion yen ($58 billion) in yen notes so far in the fiscal year started April 1, the most in 10 years, according to Bloomberg-compiled data. Corporate-bond yields dropped to the lowest level since 2016, when the Bank of Japan started its negative-rates policy, Nomura BPI data show.
Some issuers are taking steps to avoid bonds going unsold without their knowledge.
Transparent System
More of them are selling notes using the so-called pot system, under which syndicate banks share details with issuers about bond buyers to find the best prices--the norm for debt sales in the U.S. and Europe.
And some investors retain hope that the unsold debt phenomenon will fade as bankers focus more on being transparent.
“This won’t be solved right away because there are various stakeholders involved, but there’s a possibility that things will head in the right direction, for example if investor-relations activities are increased,” said Oashi at Asahi Life Asset Management.
To contact the reporters on this story: Issei Hazama in Tokyo at ihazama@bloomberg.net;Shiho Takezawa in Tokyo at stakezawa2@bloomberg.net
To contact the editors responsible for this story: Andrew Monahan at amonahan@bloomberg.net, Ken McCallum
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