The Bank of Japan’s adoption of negative interest rates drove down the debt pricing on the country's biggest-ever project finance deal. But Japan’s commercial banks are concerned what impact the move will have on their funding costs. 

Vinci and Orix closed on the ¥220 billion ($1.94 billion) New Kansai International Airport concession project, Japan's largest project financing to date, earlier this month. The ¥190 billion non-recourse term loan priced at what one banker on the deal called a “dirt-cheap” level - in the mid-80bp range over six-month Tibor (Tokyo Libor), and was split into balloon and full payment tranches.

The deal was closed a couple of weeks after the Bank of Japan (BOJ) cut interest rates on deposits to 0.1% which put downward pressure on its eventual pricing, as longer-term benchmark interest rates slid deeper into negative territory. The transaction shows just how tight the Japanese lending market is.

The New Kansai International Airport transaction is not typical however. The airport is close to some of Japan’s most popular tourist destinations including Kyoto, and saw a 20% year-on-year jump in traffic in 2015. “You don’t get that kind of growth on most concessions and that contributed to the competition that drove down the spreads,” said one banker who worked on the deal. 

Mizuho and SMBC were lead arrangers and provided 20% each of the total debt. The Development Bank of Japan, BTMU and Credit Agricole were also lead arrangers, while another eight lenders, mostly regional banks, were also in the syndicate.

The sponsors, Orix Corporation and Vinci, are due to take over operations at the airport from 1 April 2016. The total project costs are expected to be around ¥260 billion.

The downside

The debt pricing level for Kansai will not be exported outside of Japan, bankers in Tokyo insist. “The domestic lending market has evolved in isolation from the rest of the world and we wouldn’t use what’s happening in Japan as a yardstick for our international project finance pricing strategy,” the head of international project finance strategy at one of the banks told IJGlobal.

But higher funding costs are causing a headache for the local banks. The weakening of the yen over the past few years has driven up the funding costs for Japanese commercial banks in US dollar terms, and by extension, other local currencies.

In that respect, the BOJ’s adoption of negative interest rates has been painful. Earlier this month, the five-year US dollar/Japanese yen swap rate hit a record high of -102.5bp. “It’s painfully expensive,” said one Japanese banker.

The banks are now likely to keep a closer eye on pricing strategy outside the country although how much that will prohibit overseas project financing teams remains to be seen. Japanese banks continue to see project financing as part of a larger services package that includes advising on M&A. “Project financing is not isolated: it’s part of a bigger bundle of services for our clients,” said one banker in Tokyo.

The banks can also look forward to the Japan Bank for International Cooperation (JBIC) taking on more risk, which will at least ease the pressure on their balance sheets. As part of Prime Minister Shinzo Abe’s policy to back Japanese infrastructure exports, JBIC will no longer require government guarantees to provide loans

The JBIC reform is scheduled to take effect later this year and could create a new pipeline of deals for the Japanese banks.