Japanese credit investors seek M&A risks as boom

Investors in Japanese corporate bonds are increasingly seeking to protect possible credit deterioration when issuers become acquisition targets.

Changes in the control contract – if there is a significant change in the ownership structure of the borrower, certain rights granted to bondholders to redeemed the debt before maturity – have been rarely seen in Japan’s 100 trillion yen so far. However, many investors believe that future ownership uncertainties for investors, frequent issuers, such as convenience store giants Seven & I Holdings Co. and Nissan Motor Co., highlight the risks.

“We need to change the bond control covenant regardless of their credit rating,” said Hiroyuki Miyata, credit portfolio manager at Nissay Asset Management Corp.

Seven&i saw its yield jump as it copes with increasing pressure on acquisition bids to increase company value, while on bonds from market researcher Macromill Inc. and bonds from optical equipment maker Topcon Corp., it expanded to record levels as private equity firms bid.

The blowout in interest rate spreads reflects that acquisition activity could lead to ownership changes that could subsequently lead to more debt, proposals and rating downgrades.

“I got a lot of inquiries from bond investors who should prepare for potential risks,” said Kentaro Harada, chief credit analyst at SMBC Nikko Securities Inc., adding that if stocks that are not introduced to stocks are against stocks and bonds for companies with low price rates, investors may demand higher bond premiums.

Changes in control terms are often more common in other major bond markets outside of Japan, especially for issuers of spam evaluations. This is because Japanese companies have historically relied on the banking system to raise funds, and few speculative borrowers may be targeting the takeover.

However, a series of mergers and acquisitions are regaining investors’ protection. Leveraged buyouts by private equity firms often surprise bondholders, which may not be possible, especially when investing in senior companies.

The American Securities and Dealers Association of Japan chaired a series of working group meetings last year that agreed to apply changes to the control clauses and report bonds on bonds with debt ratings of BBB and lower while keeping conditions flexible.

Changes in control terms will provide guarantees if investors plan to keep bonds for a long time, said Katsuyuki Tokushima, head of pension research at the NLI Institute. “The decision to place such covenants on bonds should be something that issuers and underwriters should actively consider,” said Tokushima, a member of the JSDA working group.

“It is very likely that Japanese companies will continue to target mergers and acquisitions, and the risks will be higher this year than last year,” said Hidetoshi Ohashi, chief credit analyst at Mizuho Securities Co.

Also Read: Japanese Bond Trading Issues’ Covenant Returns

Akiko Kimura, an attorney for Anderson Mori & Tomotsune, said companies need to be able to leverage the debt market for larger funds on corporate activities with bank loans. She said bonds could start changing terms of control if investors demand further growth in calls from the covenant.

With the assistance of Yasutaka Tamura.

This article was generated from the Automation News Agency feed without the text being modified.