Japanese Companies' Credit Risk Rises Most in Four Years... Bond Issuance Burden Puts Funding at Risk

Bloomberg: "CDS Premiums Rise at 40 Major Companies"

Credit risks at major Japanese companies have worsened by the most since 2022. The deterioration comes as unease in global credit markets spreads to Japan, with company-specific risk factors, including the cost of AI investment and worsening business conditions, weighing on the market.

According to Bloomberg News on Oct. 29, five-year credit default swap (CDS) premiums rose for all 40 major Japanese companies tracked by Bloomberg from Oct. 1 through 28. The median increase was 12 basis points (1 bp = 0.01 percentage points), the largest since September 2022. At that time, aggressive monetary tightening by major central banks around the world heightened turmoil in financial markets and drove credit risks sharply higher. A CDS is a credit derivative that provides protection against the risk of a bond issuer, such as a company, defaulting on its debt. CDS premiums rise when the perceived likelihood of a company defaulting increases.

People walk past an electronic board displaying the Nikkei 225 average share price at the Tokyo Stock Exchange on the 28th. Tokyo, Japan = AFP-Yonhap.

CDS premiums rose particularly sharply for SoftBank Group, which is pursuing large-scale AI investments, and Nissan Motor, which is undergoing restructuring amid management difficulties. SoftBank Group is making aggressive investments across the AI ecosystem, including in data centers, energy and robotics. To raise funds for these investments, it issued junk bonds, or speculative-grade corporate bonds, worth 15 trillion won in September. Nissan’s credit risk appears to have risen amid a downturn in the auto industry and uncertainty over its management.

This is adding to pressure on Japan’s bond market, where the cost of issuing corporate bonds is already rising. The Nikkei previously reported that the credit spread on five-year, A-rated corporate bonds in Japan had recently widened to 0.56 percentage points. That was the highest level in about 15 years, since July 2011, when the aftermath of the Great East Japan Earthquake roiled financial markets. A credit spread is the difference between a corporate bond’s yield and that of a government bond with a similar maturity; it represents the additional interest companies must pay investors.

Corporate bond issuance is increasing, while investor demand is weakening. According to Bloomberg, Japanese companies issued about 2.5 trillion yen in corporate bonds this month, up about 50% from the same month last year and a record for October. Meanwhile, regional banks and credit unions, major investors in the market, have already incurred losses on government bonds they previously purchased as interest rates have risen, leaving them with limited capacity to buy new corporate bonds. In fact, Japanese real estate giant Mitsui Fudosan put its corporate bond issuance on hold in response to market conditions, while NTT Finance raised less funding than initially expected.

Experts expect the combination of increased corporate bond supply and unease in global credit markets to continue weighing on companies’ financing conditions for the time being. Kazuma Ogino, chief economist at Nomura Securities, told Bloomberg that “investors are demanding higher credit spreads, citing factors including the recent increase in corporate bond issuance.” He added that concerns in global credit markets, including worries about AI investment, are contributing to the rise in CDS premiums, and that “this is creating headwinds for Japan’s bond market.”

This content was produced with the assistance of AI translation services.