Cost to insure Japanese firms’ debt rises as demand falls

Japan’s corporate bond market had been an oasis of calm in recent weeks, with deals staying steady even as the coronavirus pandemic caused the worst sell-offs elsewhere since the global financial crisis. That’s now changing.

The cost to insure company debt against default in Japan has surged 77 basis points so far in March, the sharpest monthly increase since 2009, according to Credit Monitoring Arrangement data. As investors realized that Japan’s mostly high-grade corporate notes aren’t immune to the credit crisis abroad, yield premiums rose last week to the highest in five months, a Nomura bond performance index shows. Debt issuers will need to offer wider spreads as the market volatility saps investor demand, according to one underwriter.

As Japanese companies brace for damage to sales and profits from the virus outbreak, their bond sales have decreased this month and will likely fall in the fiscal year starting in April after record issuance this business year. The slide in fundraising may mean even less investments by firms, which would hurt an economy that’s already expected to contract for a second straight quarter.

“We need to watch out for what happens in May-June because the real economic impact of what happened since February will appear around that time,” said Mana Nakazora, chief credit analyst at international bank BNP Paribas SA. “There’s a possibility of defaults as companies’ falling sales and profits hurt their balance sheets.”

Until the end of February, Japan’s corporate note market, with about $650 billion of debt outstanding, appeared resilient in the face of coronavirus-related turbulence abroad. It helped that almost all of Japanese corporate issues are investment grade, and sovereign yields below zero added to the allure of company notes.

That’s all changed. “There’s an increasing number of issuers who can’t decide what to do now as uncertainties remain too strong,” said Haruhiro Ikezaki, head of debt capital markets at Mitsubishi UFJ Morgan Stanley Securities Co.

Last-minute fundraising by Japanese firms at the end of the fiscal year may have masked increasing concern in the nation’s debt market recently, according to Nakazora at BNP Paribas.