Opps to hedge international exposures locally.



       =DJ Asia Debt:Pricing In Tokyo Credit Derivs Mkt A Bit Askew

Dow Jones International News Service via Dow Jones



  By Brian Fowler


  A Dow Jones Newswires Column


  TOKYO (Dow Jones)--Pricing levels in Tokyo's credit derivatives market
show  it's cheaper to buy protection on some top-rated Japanese issuers
these days  than on U.S. names with similar ratings, a clear sign that
record-high  bankruptcies and bad debts in the banking system aren't
shaking the market's  faith in this nation's top companies.

  Take, for example, Ford Motor Co. (F) and Honda Motor Co. (HMC or 7267).
Both  have solid A2 credit ratings from Moody's Investors Service. And yet,
as of last  week, the cost of credit default protection on five-year Honda
U.S.  dollar-denominated debt stood around 30 basis points, while
protection on  five-year debt issued by Ford Motor Credit, Ford's financing
arm, was around 70  basis points.

  Bankers and institutional investors use the credit derivatives market
either  to shed risk on loans and bonds or to take on risk as an
investment. In a credit  default swap, the most commonly-used credit
derivative, one party pays a fee  measured in basis points on a notional
value. The recipient of the fee - the  risk-taker - is considered the
investor.

  In the case of Honda Motor, Japanese banks looking to reduce the exposure
in  their portfolios to that company's debt would benefit from the
relatively low  cost of doing so. But hedge funds, non-life insurers and
other investors seeking  exposure to Honda as a way of picking up revenue
would get stuck with lower  returns.

  "One of Honda's main markets is the U.S. market, so if an investor wants
exposure to the U.S. auto market, Ford offers better spreads," said Joseph
Slankas, assistant vice president in the Global Credit Derivatives division
at  Merrill Lynch in Tokyo.

  The pricing distortions in Tokyo's credit derivatives market can be
linked to  two main factors: the low interest rate environment here and
skewed  supply-demand dynamics.

  "In the last two years, markets have swung from a focus on hedging to
being  totally dominated by investors," said Malcolm Perry, managing
director at J.P.  Morgan Securities Asia Pet. Limited in Tokyo.

  Not surprisingly, heavy demand to sell protection reduces the premium on
that  service.

  More than anything else, however, the narrow spreads in Japan's credit
derivatives market underscore the relatively underdeveloped state of the
nation's corporate bond market and the effect this has on liquidity.
  For decades, Japanese companies have tended to rely heavily on bank
financing  rather than directly tapping capital markets. As a result, while
Japan's  government bond market is as big or bigger than the Treasurys
market, the  corporate bond market here remains relatively small.

  The value of outstanding Japanese corporate bonds was around Y50 trillion
at  the end of February, according to the Japan Securities Dealers
Association.  That's less than one-eighth the size of the U.S. market,
where the value of  outstanding issues stood at $3.372 trillion at the end
of December, according to  the U.S. Bond Market Association.

  A small market means a dearth of liquidity, which inhibits trading in
secondary markets.

  On top of that, the lack of an indigenous Japanese high-yield market -
all of  Japan's high-yield issuers are so-called fallen angels - leaves
investors with  few opportunities to diversify their portfolios. As a
result, the bulk of  trading in Tokyo's credit derivatives market involves
names rated A or higher.
  To be sure, there are also historical factors that tilt the supply-demand
balance. Despite the bad-loan crisis here, many Japanese bankers feel that
domestic top-rated companies are still a relatively safe bet in the
international marketplace.

  "Even if ratings are the same, we tend to feel that the real distance a
corporation has to fall to default is larger here," said Takashi Miyauchi,
manager of the Derivative Products Division at Fuji Bank Ltd.
  It's not hard to see why. The U.S. corporate landscape has been scorched
recently by the likes of companies such as Xerox Corp. (XRX) and Lucent
Technologies (LU), both of which have struggled over the past year with
heavy  debt loads and credit rating downgrades after having been considered
solid  credits going into the year 2000.

  Moody's cut its domestic currency rating for Xerox to Baa2 in September
2000,  three notches below where the rating had been at the end of 1999.
Lucent's fall  was even steeper - to Baa3 in February, four notches below
where it was in  October 2000.

  In contrast, credit derivatives players in Tokyo say they can't recall a
major  credit event on a traded Japanese name since late 1998, when
Long-Term Credit  Bank and Nippon Credit Bank collapsed in quick
succession.
  The sense of relative safety regarding top-rated Japanese names is a key
factor in the dearth of tiering - or spread - between different grades of
double  A credits, according to Kazuyasu Makabe, vice president, credit
trading at J.P.  Morgan Securities Asia.

  "Toyota Corp., with tremendous fundamentals, is rated AA1 and trades with
a  credit default swap rate around 15 basis points in yen. Sony, another
great  company, is two notches lower at AA3 and yet only trades about two
basis points  over Toyota," Makabe said.

  In the U.S. you might expect the lower-rated credit to trade at a spread
of 10  basis points or more over the higher-rated company, Makabe said.
  The upshot of this is that low spreads can squeeze some investors out of
the  market for Japanese names.

  "We are focusing on U.S. and euro names because spreads on Japanese names
are  so tight," said Koji Ogawa, assistant manager of the Investment and
Structured  Finance Group at the Tokio Marine and Fire Insurance  Co.
  Pricing is an increasing concern for casualty insurers like Tokio Marine
and  Fire because the effects of deregulation have hit profitability in
core  operations while sluggish stock prices and rock-bottom interest rates
have  weighed on investment returns.

  "The core businesses for non-life companies are becoming less profitable,
so  it's important for them to diversify earnings sources," said Ayako
Nakajima,  non-life insurer analyst at Standard & Poor's in Tokyo.
  -By Brian Fowler, Dow Jones Newswires; 813-5255-9206;
brian.fowler@dowjones.com

  -Nick Shindo contributed to this story.


  (END) Dow Jones Newswires 22-05-01

Joseph P. Hirl
Enron Japan Corp.
81 3 5219 4500
81 3 5219 4510 (Fax)
www.enron.co.jp