While corporate bond yields have been plumbing ever lower lows in the yield-starved “New Normal”, prompting even the world’s largest bond fund Pimco to warn that this is the riskiest credit market ever, Japan is about to deliver the proverbial “hold my beer” moment to the entire world.
Aiful, the consumer lender which almost went bankrupt a decade ago, is preparing to sell Japan’s first ever yen-denominated “high yield” – and in this case we use the term very, very loosely – in the public markets, showing how desperate for yield local investors are, and how much risk they are willing to take in exchange for virtually no return, as negative interest rates have now become the new normal.
What is most remarkable about the bond sale in the country where the 10Y yield has been trading mostly in negative territory for over half a decade, is that the 18 month yen junk bond is set to price on Friday with a coupon of, wait for it, 1%.
Another unique aspect of the upcoming issuance is that it is taking place in the first place. As Bloomberg notes, the junk bond offering will be historic for Japan’s bond market, where companies haven’t felt compelled to sell below investment grade notes as they’ve traditionally had close ties with banks, who tend to be more forgiving than bondholders in tough times.
While few expect the offering to trigger an avalanche of junk bond issuance in conservative Japan, recent regulatory changes have raised the possibility that the country could eventually develop such a market.
One reason is that the world’s largest state-run pension fund, the Government Pension Investment Fund, revised guidelines last year to push its return envelope, allowing it to buy yen bonds with ratings of BB or lower. As such it will likely be a beacon for Japanese debt investors, who are traditionally quite conservative, have only been slowly buying more bonds rated BBB in the past few years.
Why Aiful? According to Kinya Numata, a manager in the company’s finance department, the easing in investment criteria, together with an improvement in Aiful’s own ratings, helped pave the way for the offering, The company intends to use the proceeds from the planned bond sale for its lending business, he said.
Japan Credit Rating Agency raised Aiful’s credit rating two levels to BB with a positive outlook in November, citing expectations that the company will be able to generate stable profits in the future as interest repayment claims decline. In other words Aiful was a C credit roughly half a year ago. Even more striking is that the company – which is neither a unicorn, nor “growthy” – recorded a profit for the first time in a decade in March.
And this company, which may or may not have a sustained positive cash flow is about to add billions in new debt at the coast of 1%. If only US shale drillers could get them some of this “high yield” Japanese debt, then the entire world would be floating in oil right now.
As for Aiful’s management, the bond offering comes as a modest consolation prize for over a decade of misery. Japanese consumer lenders have been under siege since 2006, when a Supreme Court ruling ordered moneylenders to repay exorbitant interest charges on loans, and lawmakers capped how much they could charge.
And now that Japan’s lowest rated companies have discovered the holy grail to keep corporate zombies “alive” a few extra quarters, how long until all of Japan is swimming under an ocean of 1%-yielding junk bonds, extending the NIRP misery of the New Normal even longer.
One final thought: imagine what Michael Milken could have done if US junk bond yields in the 1980s were 1%…
via ZeroHedge News http://bit.ly/2Wtttrv Tyler Durden