Yen denominated bond market is faced with contraction after Lehman

September 17, 2008


Mostly from Bloomberg; commentary below:



“Lehman has 195 billion yen ($1.8 billion) of samurai outstanding. Its default on samurai bonds, yen-denominated notes sold in Japan by foreign borrowers, would be the first ever default by a U.S. company.


Samurai sales rose 61 percent this year to 2.6 trillion yen as investors sought bonds paying higher yields than notes from Japanese companies, data compiled by Bloomberg show. New issuance may exceed 3 trillion yen by year-end for the first time since 1996, Merrill Lynch & Co. predicted in July.


National Grid Gas Plc postponed what would have been its first samurai, sale manager Mitsubishi UFJ Securities Co. said in a faxed statement today, citing “market conditions”. The London-based company filed on Sept. 2 to sell 10 billion yen of the securities.


Deutsche Bank plans to sell yen bonds when “the market has recovered.”


Societe Generale SA spokesman Hideaki Hoshina declined to comment on whether the Paris-based company will proceed with its debut samurai bond offering. France’s second-largest bank filed with Japan’s Ministry of Finance on Sept. 5 to sell three- and five-year notes


“It will be difficult for independent investment banks to sell samurai bonds after this,” said Tetsuo Ishihara, credit analyst at Mizuho Securities”


Comment: In order to understand the significance of this development, one must first recall that the greed for higher yield by Asians has been one of the fundamental building blocks of the past bubble. As they recycled their export earnings into US and other higher yielding debt, the bubble could be inflated, and the cycle perpetuated.


The carry trade, samurai bonds, and similar paper, have indirectly been some of the major sources of funding for consumption in the West. As defaults fell globally in the low interest environment, and as perception of risk fell to very low levels, ever more Japanese and others had been buying these bonds in order to escape the very low returns at home. And the Asian financial markets, so far evading many of the worst aspects of the credit crisis, had offered an outlet for US financials and others facing often difficult conditions at home.


Lehman’s collapse appears to have been a shock for them, as their issuance was close to ten percent of the entire samurai bond market. The Asian mentality is in general more risk-averse than the Western, and the severe damage from the Lehman bankruptcy may cause contraction or freeze in another funding source for corporates.


Lehman will probably fail to repay almost all of its debt after filing for the biggest bankruptcy in history, according to S&P.


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