BOJ Debt Plans May Only Add to Low-Rated Companies’ Struggles

By Theresa Barraclough and Yumi Ikeda

Feb. 19 (Bloomberg) -- A potential Bank of Japan plan to buy corporate debt may fail to bring down borrowing costs while exacerbating the struggles of lower-rated companies as investors remain reluctant to lend, Morgan Stanley Japan said.

The central bank may today say it will buy as much as 1 trillion yen ($10.8 billion) of corporate bonds with the strongest or second-strongest ratings, economists surveyed by Bloomberg said before the BOJ concludes a two-day policy meeting. Such a plan would only start to ease the funding crunch for higher-rated companies in September, while leaving behind those with poorer ratings, said Hidetoshi Ohashi, a managing director for credit markets at Morgan Stanley in Tokyo.

“A-rated or higher debt may be supported by the BOJ plan,” Ohashi said. “Even so, lower-rated corporate bonds may slump, especially should companies get downgraded as banks will become increasingly reluctant to lend to them. I have a negative view for low-rating companies.”

The cost to protect Japanese corporate debt against default soared to a record this week on concern company failures will increase after the economy shrank last quarter by the most since the 1974 oil shock. Bank of Japan Governor Masaaki Shirakawa and his colleagues have said they want to lower corporate borrowing costs rather than trim the key interest rate, which is already close to zero.

Policy makers will probably keep the overnight lending rate at 0.1 percent at the meeting which ends today.

Investment Timing

Ohashi recommends waiting until after September to buy corporate bonds. Investors ought to time purchases for after balance sheets are posted at the end of the first half of Japan’s fiscal year, which may indicate when corporate bonds will start to advance, he said.

“The decline in corporate bond prices has been remarkable and it seems like we haven’t hit bottom yet,” Ohashi said. “I can’t deny that there’ll be more ratings cuts, widening losses and continuing slumps in stocks, so the risk of further declines in corporate bond prices remains.”

The annual cost of protecting $10 million of bonds in 50- investment-grade Japanese companies from default increased $247,000 to $550,000 in the past three months, according to data compiled by Bloomberg.

Credit-default swap indexes are benchmarks for protecting investors in bonds against default, and traders use them to speculate on changes in credit quality. The swaps pay the buyer face value in exchange for the underlying securities if a borrower fails to adhere to its debt agreements.

Commercial Paper

The central bank may also extend a commercial paper purchase program, which is due to end on March 31, as well as an unlimited collateral-backed lending facility for banks slated to end in April.

The programs have done little to bring down borrowing costs for companies with anything other than the strongest credit ratings. Companies with an A-1 rating, the second highest, are paying 34 basis points more to borrow for three months than Japanese banks charge each other, while companies with a lower, A-2 score, pay 103 basis points more. A basis point is 0.01 percentage point.

Those spreads have changed little since the BOJ started buying A-1 and A-1+ commercial paper last month.

To contact the reporter on this story: Theresa Barraclough in Tokyo at tbarraclough@bloomberg.net; Yumi Ikeda in Tokyo at yikeda4@bloomberg.net.