Japan Credit Markets Update: New convertible issues push spreads wider

Convertible bond issues by Japan’s largest leasing company, Orix, and its biggest trading house, Mitsubishi, drove Japanese credit default swap spreads wider this week in an otherwise quiet market.

Credit default swap spreads "are quite tight now", and participants are holding onto their positions going into the summer, said one trader. Another trader agreed, noting that spreads had widened sharply recently on rumours of a further downgrade of Japan’s sovereign credit rating.

Orix and Mitsubishi were the most actively traded names, after both companies unveiled convertible bond issues plans this week. According to Japanese media, Orix expects to price its bond on June 14, and Mitsubishi plans to price its bond on June 17.

Mitsubishi’s nine-year credit default swap spreads widened 23 basis points to 78bp after the company said on Monday it plans to offer ¥150 billion, or $1.2 billion, of nine-year convertible eurobonds. After the initial boost in demand, the spread tightened back down to around 70bp on Friday.

Participants also ran for Orix credit protection after the company said on Tuesday it plans to sell $400 million of zero-coupon 20-year convertible bonds, sending its five-year credit default swap spread 40bp wider to 160bp. By Friday, the spread had tightened back to about 133bp.

Besides the convertible bonds, there was an absence of major market-moving news this week. Traders said the World Cup, which Japan and South Korea are co-hosting and which is kicking off this week, has kept many trading floors in Tokyo subdued.