The Japanese Government has agreed to guarantee the JPY200 billion (RM7.4bill) 10-year Samurai bond issuance of Malaysia government at 0.65% coupon which was announced during Malaysia’s 2019 budget This article will look into what is Samurai bond and what is the advantage/disadvantage in issuing Samurai Bond.
This offer may look attractive with its 0.65% coupon which is much lower than Malaysia Government Securities (MGS) 10-year maturing 6/2028 coupon 3.73%.
However, Malaysia need to repay back the principal at the end of maturity in Japanese Yen and there is no guarantee that the level of the yen will remain the same 10 years later. Even if the government hedge the future currency exchange, the premium government paid may resulted in the effective interest to exceed current MGS coupon level. Nonetheless, there are other attractive feature of issuing Samurai Bond besides its attractive low coupon.
What is a ‘Samurai bond’?
A samurai bond is a yen-denominated bond issued in Tokyo by a non-Japanese company and subject to Japanese regulations. These bonds provide the issuer with an access to Japanese capital, which can be used for local investments or for financing operations outside Japan.
Samurai bonds give issuers the ability to access investment capital available in Japan. The proceeds from the issuance of Samurai bonds can be used by non-Japanese companies to break into the Japanese market, or it can be converted into the issuing company's local currency to be used on existing operations.
Why Malaysia issuing Samurai Bond?
The Japanese Government has agreed to guarantee the JPY200 billion (RM7.4bill) 10-year Samurai bond issuance of Malaysia government at 0.65% coupon which was announced during Malaysia’s 2019 budget. The government has also mentioned that the proceed from the issuance will be used to reduce some of the Malaysia’s expensive loans.
This news is significant as some of the Malaysia’s foreign denominated government guarantee (GG) bond are issued at 5.99% coupon which is much higher compared to local currency GG bond such as 10-year Prasarana GG bond below last traded at 4.39%.
The Japanese Samurai Bond market sales have been the highest in 2018 since 2008 as reported by Bloomberg. Foreign investor has been actively tapping into the Japanese market with emerging market remain volatile. For the Japanese investor, Samurai bond pay higher yield than its domestic bond as Bank of Japan kept its local 10-year Government Bond near zero level at 0.123% (as at 7 Nov 18).
Looking at liquidity and demand for Malaysia Samurai Bond, the Japanese government has agreed to guarantee the issuance through its Japan Bank for International Corporation. Therefore, Japan’s local investor bear not much risk from holding government guarantee samurai bond other than its own sovereign risk. Its is expected the issuance of Malaysia Samurai Bond will be accepted with open arms by the local Japanese investors and other foreign investors in the Japanese bond market.
The benefit of issuing Samurai Bond for Malaysia is the access to the bigger investor base and relatively low interest rate. However, Malaysia as an issuer must be careful of the currency risk. Malaysia as an issuer need to repay back the principal at the end of maturity in Japanese yen and there is no guarantee that the level of Yen will remain the same 10 years later. This mean Malaysia may need to pay more than expected if the Japanese yen strengthen 10 years later when the bond reach maturity.
Advantages and Disadvantages of Samurai Bond
- Samurai bonds provide access to a diversified and deep pool of capital.
- Samurai bonds have relatively lower interest rates.
- Japanese institutional investors can easily invest in Samurai bonds because they are issued in Japan.
- Samurai bonds do not have to be left in the custody of securities companies or other institutions.
- As for Japanese institutional investors, foreign firms are very popular because of their high name recognition and good investment rating; as many of these funds are very conservative, they prefer to invest in larger companies with international presence.
- Japanese market is not subject to the same variations and market swings as the U.S. and European markets, giving companies an alternative financing source during economic downturns.
- Samurai bond market has high tax rates and an unclear fiscal environment.
- Lack of a constant policy remains a serious concern of US-based companies.
- Lack of flexibility of issuance terms and conditions that create restrictions to use bonds.
- Companies that have issued samurai bonds have found high administrative burdens placed upon issuing companies.
- Complicated issuing procedures and high taxes have made Samurai bond market less attractive than European markets, and experience slow growth.
Is this Malaysia’s first time issuing Samurai Bond?
This is not the first time Malaysia participate in Japanese Samurai bond. In 2015, Maybank issued JPY31.3 billion Samurai Bond comprising of two series of fixed rate bond with 3-year and 5-year maturity at coupon 0.397% and 0.509% per annum. These bonds have been rated A3 by Moody's and A by Japan Credit Rating Agency, Ltd. The issuance of the Samurai bonds was approved by the Securities Commission Malaysia on April 3, 2015.
Other foreign bonds include Kangaroo bonds, Maple bonds, Matador bonds, Yankee bonds, and Bulldog bonds.
For more information on Malaysia’s government guarantee bond and sukuk, this can be found using BIX SEARCH tools in BIX Malaysia website (www.bixmalaysia.com
) using 2 easy steps below:
- Click the BIX SEARCH function on the front page
- Filter the rating function to Government Guaranteed
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