* Better funding costs drive European lenders to return to yen market
By Frances Yoon
HONG KONG, Sept 19 (IFR) - Japan's Samurai bond market is staging a comeback after an improvement in cross-currency swap spreads put the country back on the radar for international issuers.
Standard Chartered was the first to take advantage of the improved conditions, with a five-year senior bond on September 8 that marked the first Samurai issue in almost two months. The five-year yen/euro basis swap has narrowed from -56bp in mid-June to -37bp, while the yen/dollar equivalent has shrunk from -96bp to -82bp.
A less negative swap translates to a lower premium over euro or US dollar Libor for companies that borrow in yen.
Sources say French banks are now closely monitoring markets as they look to follow StanChart's lead, breathing life into a sector that had stalled due to volatile yen rates and Brexit fears.
None of the French lenders have mandated for Samurais yet, said a banker close to the talks.
The last foreign issuer to sell Samurai bonds in Japan was Mexico's state-owned oil company Petroleos Mexicanos (Pemex) , which raised 80 billion yen ($783 million) in July.
Higher yields
For the time being, potential Samurai issuers are likely to focus not on the typical senior unsecured format but on higher-yielding instruments such as total loss absorbing capacity (TLAC) and Tier 2 capital, as the Bank of Japan's negative rate policy leaves investors struggling to find higher returns.
Ultra-tight spreads have led underwriters to market senior unsecured bank Samurais on an absolute coupon basis since the start of this financial year, but TLAC and Tier 2 bonds are still priced off yen offer-side swaps - the traditional benchmark in the Samurai marketing process.
"The Samurai market has rejuvenated itself by marketing on a spread," said a treasurer at a Double A rated Samurai issuer.
"From the issuer's perspective, it was hard to work off an absolute coupon because it added another layer of obscurity to see my all-in cost in, say, euros. But off a swap spread, I can come up with a fairly good view of all-ins. As rates have gone up over the past few months, people are back to a normal thought process."
Standard Chartered issued its 45 billion yen ($442 million) 0.523 percent five-year TLAC-eligible bond at 55bp over offer-side swaps on September 8, opening the market after the United Kingdom's vote to leave the European Union and demonstrating that Japanese investors were willing to overlook Brexit fears in exchange for a premium.
HSBC wasted no time, coming the following week with a similar 181.8 billion yen triple-trancher across five, seven and 10-years. French carmaker Renault priced a 50 billion yen three-year the same day.