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(Oct 23): Genting Singapore is raising ¥20 billion ($241.2 million) worth of fiveyear bonds with a coupon of 0.669%. The settlement date for the bonds is Oct 24, 2017, while the maturity date is Oct 24, 2022.

This is Genting Singapore’s first Samurai bond deal, which comes amid expectation in the market that the company will bid for a casino licence in Japan. The bond proceeds will be used for working capital and general corporate purposes by its “Japan branch”. The company established an office in Tokyo last month.

“The new Samurai bond can further strengthen Genting Singapore’s strong cash position and reduce currency risk should it be successful in the Japan venture,” says Jacintha Poh, vice-president and senior analyst at Moody’s Investors Service. Genting Singapore, which owns Resorts World Sentosa, has been given an “A3” rating by Moody’s. The yen-denominated bonds are expected to earn an “A” rating from Rating & Investment Information.

Last year, Japan’s parliament gave a preliminary green light for licensed casinos in the country. But a separate bill spelling out the details still needs to be passed. This process could gain momentum after Japan’s elections on Oct 22. Already, heavyweight Las Vegas players such as Wynn Resorts, MGM Resorts International and Las Vegas Sands have expressed interest in bidding for a casino licence in Japan when it becomes possible to do so. But Genting Singapore still stands a good chance, some analysts say.

“The Genting group has a demonstrated track record in constructing and operationalising integrated resorts [IRs] in regulated markets such as Malaysia and Singapore and competitive markets such as the US, UK and Bahamas. The group is in a net-cash position,” says Nandini Vijayaraghavan, an analyst at Finsights Research.

“Genting Singapore, unlike [Las Vegas Sands that runs Marina Bay Sands], did not have a problem in adhering to the construction schedule of its Singapore IR during the 2007/08 global financial crisis.”

A local analyst estimates that the cost of building an IR that includes a casino in Japan could range from US$6 billion ($8.15 billion) to US$10 billion. That is a big investment even for Genting Singapore. The company has a market capitalisation of $14.2 billion. For 1HFY2017 ended June, Genting Singapore reported revenue of $1.2 billion and earnings of $324.4 million.

Strong cash position Still, winning a bid to build an IR with a casino in Japan would be hugely positive for Genting Singapore. According to a report by CLSA, if Japan were to license two IRs in major population zones in the country, the properties could reap some US$10 billion in revenue. “When the casino is up and running, it will be very cash-generative and this would allow the Samurai bonds to be redeemed,” says the local analyst.

As it is, Genting Singapore is generating buckets of cash flow and has a liquid balance sheet. “Genting has an excellent liquidity position, supported by its sizeable cash holdings,” says Moody’s in its latest report. “As at June 30, 2017, it maintained a strong net-cash position, with a cash balance of $5.7 billion, compared with total balance-sheet debt of $1.1 billion and $2.3 billion of perpetual capital securities.” Over the next 12 months, Moody’s projects Genting to generate around $900 million of operating cash flow.

On Sept 12 and Oct 18, Genting Singapore redeemed all of its $2.3 billion in perpetual securities. “I estimate Genting Singapore, even after its October 2017 redemption of $2.3 billion perpetual capital securities, will have a cash balance of $3.5 billion and will sustain its net-cash position,” says Vijayaraghavan.

Meanwhile, Fitch sees little risk to Genting Singapore even though the 10-year moratorium on new casino licences expires this year. “We do not expect competitive pressure on Genting Singapore to increase in the near term, as additional licences in Singapore are improbable, despite the expiry of the moratorium on such licences in 2017, given government concerns over problem gambling,” says a report by Fitch, which has an “A-” rating on the company.

Are Samurai bonds a good option? CIMB Research forecasts a net profit of $592.2 million for Genting Singapore in FY2017, and $678.2 million in FY2018. The stock is up 31.5% this year, and is currently trading at 20.9 times CIMB’s 2018 earnings forecast. Based on its total dividend of three cents a share for 2016, the stock offers a yield of 2.5%.

On the face of it, the coupon of 0.669% on Genting Singapore’s new Samurai bonds appears rather low. But yields in Japan are generally low. In fact, with the new measures taken by the Bank of Japan (BOJ), the yield of 10-year Japanese government debt actually fell into negative territory in September for the first time in a year. The hunger for yield has also compressed spreads on corporate bonds to their lowest levels since early 2016, according to Bloomberg’s data.

“Credit spreads remain very tight in Japan and there is a negative interest rate environment. Low coupons with tight spreads are not factors that would attract investors outside Japan to participate in yen credit markets,” says Kazuhide Tanaka, chief representative and head of long-term funding at Rabobank Tokyo.

In fact, many Japanese investors are looking overseas for yield. “[Many investors] don’t believe Samurai bonds are attractive relative to [those] hedged offshore, as the conditions are favourable for the issuers because domestic corporate spreads are very tight in Japan,” says a global market analyst who declined to be named. “And the main buyers of Samurai bonds are relatively small Japanese financial institutions whose access to hedged offshore bonds is not excellent.”

However, Samurai bonds offer natural exposure to the Japanese yen, which some investors might find attractive. The yen has depreciated more than 10% against the Singapore dollar over the last 12 months. Moreover, Samurai bonds offer value relative to yen-denominated bonds from Japanese issuers, according to some market watchers.

“If you compare the spread between similarly rated domestic bonds and Samurai bonds, investors enjoy better spreads from Samurai bonds,” says Akihiro Igarashi, executive director at Nomura Securities’ syndication department in Tokyo. “International issuers also tend to pay more than what they would pay in other markets, because of the current lowyen- yield and basis-swap condition. So, investing in Samurai bonds is attractive relative to Japanese-issuer bonds.”

Igarashi adds that Japan does not have much of a high-yield bond market. So, investors who reach for yield in the Japanese bond market might well turn to Samurai bonds. “Even at current yields, I would expect domestic investors to continue to show an appetite for yendenominated bonds issued by foreign issuers,” he says.

The main risks for investors in Genting Singapore’s Samurai bonds could well be macro factors — specifically, Japanese growth taking off and prompting BOJ to shift its loose stance. “Investors need to ask if there is a risk that the government will tolerate higher yields post the election,” says Magdalene Teo, head of fixed-income research, Asia, at Bank Julius Baer.

Already, yields are rising on concerns that Shinzo Abe’s incumbent party as well as the opposition led by Tokyo governor Yuriko Koike might accept a looser fiscal policy, according to Teo. There is also talk that BOJ governor Haruhiko Kuroda may be more tolerant of a gradual rise in yields, following his recent speech that the economy was performing better than expected despite inflation being well below the 2% target. With central banks such big players in the bond market, “the yields of higher-quality paper do not reflect the credit risk of investing in the securities”, Teo adds.

Genting Singapore issues Samurai bonds to fund Japanese branch

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