(Bloomberg) -- Rakuten Group Inc. sold a $550 million junk-rated global dollar bond at the lowest cost in over three years, as signs emerged of increasing investor confidence in the Japanese e-commerce firm’s efforts to reverse years of losses.
The online-mall operator priced subordinated notes that yield 8.125%, according to a person with knowledge of the matter. That’s the lowest pricing for a US-currency note from Rakuten since 2021, when the company lost investment-grade status at S&P Global Ratings, according to data compiled by Bloomberg. Initial price talk for the deal was around 8.375%, the person, who asked not to be identified as the details are private, said.
Rakuten is a rare Japanese issuer in the US high-yield market, upon which it has become increasingly reliant for funding after its credit ratings downgrade and losses on account of its mobile network business. The company, which priced $3.8 billion of dollar bonds between January and April, said it plans to use the funds from the latest offering to redeem yen notes that have call options late next year.
The “issue might not leave much room for spread compression” in the secondary market after pricing, said Bloomberg Intelligence analyst Sharon Chen, given Rakuten’s subordinated note callable in 2031 currently yields around 8.1%.
Rakuten’s third dollar bond sale of 2024 pricing at a yield of this level is significant given the company’s priced a note in April at a yield of 9.875% for a BB rated debt security. In the latest issue, Rakuten sold a subordinated bond with a rating of single B from S&P, three levels below its issuer score.
A dearth of high-yield issuance from Asia in recent years, since Chinese developers defaulted on a raft of debt, and expectations of more rate cuts by the Federal Reserve in the US also provided tailwind for Rakuten’s bond issue. Spreads on US junk notes tightened to their lowest since 2007 in November and are hovering near historic lows, a Bloomberg index shows.
“Because of less issuance out of Asia ex-Japan, especially from China and in high yield, investors are looking elsewhere including Australia and Japan,” said Bloomberg Intelligence’s Chen. Still, challenges linger for Rakuten with a “stretched balance sheet and an uncertain outlook for its mobile unit,” she said.
As the US credit market environment is good, more Japanese companies will likely sell dollar bonds going forward, according to Naoto Matsushita, credit analyst at Mizuho Securities Co.
“Japanese companies’ funding needs in the dollar will likely continue as long as markets expect the US economy to have a soft landing and not a big recession,” Matsushita said.
Billionaire Masayoshi Son’s SoftBank Group Corp. and Rakuten, founded by Hiroshi Mikitani, are among a handful of Japanese issuers that have speculative-grade ratings from international rating firms and can tap overseas debt markets.
S&P Global Ratings revised its outlook on the company’s credit rating to stable from negative earlier this year, citing reduced losses at its mobile carrier business. Rakuten has also been selling stakes in financial units to boost liquidity, including the recent sale of a roughly 15% share in its lucrative credit card arm to Mizuho Financial Group Inc.
Rakuten has ¥400 billion ($2.7 billion) of yen-denominated bonds maturing in the first half of next year but the company has no dollar notes due in 2025, the data show.
That Rakuten can offer a subordinated bond at this time in the dollar market is a positive sign, said Taketoshi Tsuchiya, chief executive officer of Tsuchiya Asset Management Co. Still, it also likely signals hurdles for the company in fundraising in its home market, he added.
--With assistance from Takahiko Hyuga and Josyana Joshua.
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