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Financial Markets Report 4. Credit market Credit spreads have been stable at tight levels on the Chart 37: Corporate bond spreads whole, and the favorable environment for financing % points remained unchanged as the amount issued and 1.0 originated increased for products such as CPs, Aa A 0.8 Baa Ba corporate bonds, and syndicated loans. The stable environment in the credit markets in recent years 0.6 remained underpinned by: (1) solid corporate earnings 0.4 and improvement in balance sheet quality, (2) investors’ search for yield behavior, and (3) positive 0.2 lending attitude of banks. 0.0 Jan-04 Jul-04 Jan-05 Jul-05 Credit spreads remain at tight levels on the Notes: 1. Spreads on bonds with 5-year maturity. whole 2. The indicated ratings are those of Moody’s. Source: Japan Securities Dealers Association Looking at the credit spreads in detail, spreads with a rating of single A and higher remained stable at Chart 38: CDS indices (Japan, US, Europe) extremely tight levels while corporate bond spreads bps and CDS premiums for firms with a rating of triple B 80 or double B widened (Charts 37 and 38). The widening 70 of spreads was due largely to idiosyncratic concern 60 over some firms with disappointing performance and 50 did not suggest deterioration in the credit market as a 40 whole. Furthermore, the shape of the credit curve has 30 remained almost the same because the change in 20 spreads observed in this period for ratings of triple B 10 US Europe Japan and others was limited from a relatively long-term 0 perspective (Chart 39). Jan-04 Jul-04 Jan-05 Jul-05 Notes: Japan: iTraxx CJ, US: DJ CDX NA.IG, Europe: iTraxx Europe Source: Markit Group Chart 39: Corporate bond credit curves (Japan) (Reference) Corporate bond credit curves (US) % % 4 4 average (01/04/99-12/30/05) average (01/04/99-12/30/05) end-June 2005 3 3 end-June 2005 end-December 2005 end-December 2005 2 2 1 1 0 0 Aa A Baa Ba Aa A Baa Ba Notes: 1. Spreads on bonds with 4- to 6-year maturity. Note: Spreads on bonds with 3- to 5-year maturity. 2. The indicated ratings are those of Moody’s. Source: Merrill Lynch Source: Japan Securities Dealers Association 16 In the market of yen-denominated bonds issued by Chart 40: Yen-denominated foreign bond non-residents (Samurai bonds), spreads of the spreads bps bps financing-arms of some U.S. automakers widened 900 90 (Chart 40). In the markets of public sector bonds 800 GMAC#3 (Ba1) 80 (government guaranteed bonds, municipal bonds, and 700 FMCC#1 (Baa3) 70 Fiscal Investment and Loan Program Agency bonds), 600 Citi#5 (Aa1, right scale) 60 reflecting the political discussions on privatization and 500 50 consolidation of governmental financial institutions, 400 40 300 30 spreads on some institutions widened (Charts 41 and 200 20 42). However, most of the other issues performed 100 10 solidly in both markets. 0 0 Jan-05 Apr-05 Jul-05 Oct-05 During the second half of 2005, spreads on some Notes: 1. Spreads on bonds with 3-year maturity. firms have widened. But these were for idiosyncratic 2. The indicated ratings are those of Moody’s at reasons with little effect on the credit market as a end-December 2005. Source: Bloomberg whole, leaving overall spreads tight. Meanwhile, in the U.S. market, spreads for GM and Chart 41: Government guaranteed bond and municipal bond spreads Ford which had been fairly stable during the summer, % 0.20 started to widen again due to the Chapter 11 Tokyo-to Osaka-fu bankruptcy of an auto-parts company that had strong Japan Finance Corporation for Municipal Enterprises 0.15 business relations with GM. Nonetheless, as was the Jointly issued local bonds case in Japan, while the spreads of auto-related firms 0.10 widened, spreads of the overall market remained tight against the background of solid corporate performance. 0.05 0.00 Jan-05 Apr-05 Jul-05 Oct-05 (Reference) CDS spreads on GM/Ford A Note: Spreads on bonds with 10-year maturity. bps B C 1400 Source: Japan Securities Dealers Association GM 1200 Ford 1000 GMAC Chart 42: FILP agency bond and bank 800 FMCC debenture spreads 600 % 0.30 Development Bank of Japan 400 Japan Bank for International Corp. 0.25 Japan Expressway Holding and Debt Repayment Agency 200 Narita International Airport Corp. 0.20 The Shoko Chukin Bank 0 Jan-05 Apr-05 Jul-05 Oct-05 0.15 Notes: 1. (A) Mar. 16: GM lowered its first-quarter and 0.10 full-year 2005 earnings guidance. (B) Oct. 8: Delphi filed for Chapter 11 bankruptcy. 0.05 (C) Oct. 27: GM and GMAC received subpoenas from SEC. 0.00 2. Spreads on bonds with 5-year maturity. Jan-05 Apr-05 Jul-05 Oct-05 Source: Bloomberg Notes: 1. Spreads on bonds with 5-year maturity for Development Bank of Japan and the Shoko Chukin Bank, while those with 10-year maturity for the others. 2. Japan Expressway Holding and Debt Repayment Agency took over Japan Highway Public Corporation on 1st October 2005. Source: Japan Securities Dealers Association 17 Favorable financing environment Chart 43: Year-on-year change in Bank lending, corporate bonds and CP issuance Looking at the primary market, outstanding of CPs % % increased, reflecting the financing needs of 5 20 4 Corporate Bonds 18 corporations for larger winter bonus payments and so 3 Bank Lending 16 forth. Issues of corporate bonds (SBs) increased as well 2 CP (right scale) 14 1 12 (Charts 43 and 44). The amount issued by electric 10 0 power companies, which had been declining for the 8 -1 6 last several years, started to increase due to expanded -2 4 plans for business fixed investment. The amount of -3 2 subordinated debt issued by major and regional banks -4 0 -5 -2 rose as well. Looking at the amount issued by rating Apr-02 Oct-02 Apr-03 Oct-03 Apr-04 Oct-04 Apr-05 Oct-05 grades, there was a notable increase in issuance by triple B-rated firms (Chart 45). Notes: 1. The bank lending amount is adjusted to exclude factors such as the liquidation of loans. 2. The corporate bonds and CP are figures as of end of month. During the second half of 2005, there was a notable 3. The latest figure of corporate bonds is as of Nov., 2005. increase in the number of firms that issued SBs for the Sources: Bank of Japan, Japan Securities Dealers Association, I-N Information Systems first time. In 2005, the number of companies that issued their first bonds reached to 37, the highest since 1998, when firms increased their bond issuance as a Chart 44: Domestic corporate bond (SB) issuance by sectors substitute for bank loans against the background of constraints on banks’ lending capacity amidst the trillion yen 3 financial system problems (Chart 46 and 47). Among Banks these 37 firms, about half were regional banks and Electricity and gas bank holding companies issuing subordinated debts. At 2 Others the same time, issuance by real estate investment trusts (REIT) and IT related companies increased. 1 Chart 45: Domestic straight corporate bond 0 issuance by ratings 02/1Q 02/3Q 03/1Q 03/3Q 04/1Q 04/3Q 05/1Q 05/3Q trillion yen Note: Banks include bank holding companies. 3 Source: I-N Information Systems AAA AA A BBB 2 Chart 46: Numbers of new issuers 70 1 60 50 0 40 02/1Q 02/3Q 03/1Q 03/3Q 04/1Q 04/3Q 05/1Q 05/3Q 30 Notes: Issuers are classified by the highest rating among S&P, 20 Moody’s, R&I and JCR. Source: I-N Information Systems 10 0 FY92 93 94 95 96 97 98 99 00 01 02 03 04 05 Source: I-N Information Systems 18 The number of Japanese REIT has increased and its Chart 47: New issuers by sector market capitalization has reached around 3 trillion yen (Chart 48 and Box 3). In 2005, these funds started CY 2004 CY 2005 issuing REIT bonds as a means of diversifying their Issuers Amount Issuers Amount financing sources. For the corporate sector, triple B- New issuers 15 6,335 37 10,800 rated firms, many of which are IT related firms having Banks 6 3,550 19 5,450 a strong need for financing to expand their business, Local Banks 2 350 15 2,250 increased the amount issued. REIT 0 0 7 1,750 Others 9 2,785 11 3,600 BBB rated 6 1,085 7 2,120 In the Samurai bond market, issuance amounts increased mainly for the financial related sector (Chart Notes: 1. Issuers are classified by the highest rating among S&P, 49). The low issuance costs in Japan seemed to have Moody’s, R&I and JCR. 2. Volume unit: 100 million yen attracted the issuers. Source: I-N Information Systems Meanwhile, the issuance of public sector bonds excluding the residential mortgage backed securities (RMBS) issued by the Government Housing Loan Chart 48: J-REIT Markets trillion yen Corporation (GHLC), decreased compared with a year 3.0 30 ago (Chart 50). This was mainly due to the decrease in 2.7 27 government guaranteed bonds issued by the Depositary 2.4 Market Capitalization (left scale) 24 Insurance Corporation of Japan. 2.1 Number of Funds (right scale) 21 1.8 18 1.5 15 Chart 49: Amount issued of yen-denominated 1.2 12 foreign bonds 0.9 9 0.6 6 0.3 3 0.7 trillion yen 0.0 0 Others 0.6 Sep-01 Jun-02 Mar-03 Dec-03 Sep-04 Jun-05 0.5 Financial related firms Note: Figures are as of month-end.
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