Companies like Japan Airlines Co. are choosing bank loans over bonds for longer-term funding needs as investors bracing for an end to the era of ultra-cheap money drive up yields.
(Bloomberg) — Companies like Japan Airlines Co. are choosing bank loans over bonds for longer-term funding needs as investors bracing for an end to the era of ultra-cheap money drive up yields.
The Tokyo-based carrier took out yen loans in recent weeks, while brewer Suntory Holdings Ltd. decided to partially refinance a subordinated bond with loans. These are stark examples of the tradeoff firms need to take into consideration amid speculation a new Bank of Japan governor will eventually dial back ultra-easy monetary policy.
Anecdotal evidence, including from interviews conducted by Bloomberg News, suggests Japanese loan rates are now more favorable than the cost of selling long-tenor bonds for capital investment and refinancing needs, which typically plummet in value if interest rates rise.
“We were concerned that we wouldn’t have been able to attract enough demand, because we don’t think investors are too excited to buy longer bonds,” said Yuichiro Kito, general manager of finance at Japan Airlines, which got a 26.5 billion yen ($197 million) transition-linked loan this month to buy two fuel-efficient aircraft. “Japan’s corporate bond market hasn’t been functioning properly.”
Although there’s no comprehensive data available and companies declined to disclose financing terms, the most recent BOJ statistics put the rate for new loans at just 0.704%. That’s as average coupons on corporate bonds have almost doubled to 0.86% this year, according to data compiled by Bloomberg, as the credit market has been quicker to reflect concerns about any potential change to monetary policy.
Adding to signs of strong demand, the outstanding amount of loans from major banks reached a two-decade high of 240 trillion yen in January, and remained very close to that last month, according to data compiled by the BOJ.
BOJ Speculation
Some companies are favoring loans amid speculation in the bond market that incoming BOJ governor Kazuo Ueda will tweak the yield curve-control framework at some point, even though he backs easy policy for the time being. The outgoing central-bank chief, Haruhiko Kuroda, maintained a loose policy stance at his final meeting last week.
Supermarket chain Aeon Co. also said on Wednesday that it’s looking mainly at loans to refinance debt.
The Nikkei reported last month that Tokyo Electric Power Company Holdings Inc. is planning to get a total of 400 billion yen of loans from major banks. The electricity provider said it couldn’t comment on individual deals when contacted by Bloomberg News.
Longer-term Funding
Although there’s been a rush of yen-denominated bond sales this year, it’s been mainly concentrated in shorter maturities. Issuance of bonds maturing in longer than five years has dropped 32% to 890 billion yen from the same period last year, while average coupons have surged to 1.23% from 0.65%, the data show. In the loan market, average rates across tenors have stayed below 1% since April 2014.
Riskier subordinated bonds in particular have seen “quite a dramatic increase” in borrowing costs relative to similar loans, said Yutaka Itoh, a senior general manager at the finance department of Suntory. The beer-maker decided to mainly refinance 72 billion yen of subordinated notes callable in April with loans.
“It’s still possible to get funding from the credit market through five-year notes, but loans may make more sense for 10-year financing,” said Toshiyasu Ohashi, chief credit analyst at Daiwa Securities Co., the second-biggest arranger of yen corporate bonds this fiscal year.
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