News that Reliance Jio has raised 53.5 billion Japanese yen (approximately Rs 3,251 crore) in Samurai loans is proof that as the telecom sector in India evolves, not only is Reliance Jio pushing for changes on how businesses are run, but it is also innovating on the capital structure front. There are important takeaways for the infrastructure sector from this Samurai loan.
Tapping into Japanese investors provides infrastructure businesses in India with an opportunity to access a large pool of capital that is looking for returns in a low interest rate environment. While an Indo-Japan collaboration through Japanese technology transfers is extremely beneficial, capital transfers through Samurai loan-type transactions is an area that deserves equal attention.
Reliance Jio’s Samurai loan allows it to borrow in a relatively low interest rate currency such as the yen and eventually swap the yen back into rupees to fund investments at home. Even factoring in for hedging costs, such transactions allow companies to borrow cheaper than a similar loan in India. Most importantly, it opens up a large pool of capital in Japanese institutions and retail investors.
To get an idea of why Japanese investors, who have traditionally invested largely in Japanese government bonds and equities, might want to start looking at offshore markets such as India, one needs to understand the policy changes and macro-economic conditions in that country, especially over the last few years. “Abenomics”, extensive monetary easing by the Bank of Japan and extremely low interest rates have all contributed to the changing macro-dynamics.
The size of assets with Japanese investors is significant, with institutions such as Government Pension Investment Fund (GPIF) having a total of 162.6 trillion yen of assets under management in December 2017. This makes GPIF the single-largest pension fund manager in the world. In addition, there is a structural shift underway in organisations such as the GPIF through a series of reforms initiated in 2014 — a shift that has seen the investment focus move towards international equities, bonds and alternative assets.
It is important for India to attract a part of this reallocated capital not just from GPIF but other large Japanese financial institutions. The Reliance Jio deal has shown that there is healthy appetite amongst Japanese investors for Indian businesses that have robust models.
To further understand why Japanese investors would have an interest in Indian debt-like investments one needs to look at data at an individual level. According to the annual survey by the Central Council for Financial Services Information, a body administered by the Bank of Japan, 54.1 percent of Japanese household financial assets are held in savings and bank deposits, with only 8.9 percent held in stocks.
When one considers Japan’s ageing population, one realises that the demand for fixed coupon paying assets such as bank deposits will only increase in the country. So, even if the average household does allocate more towards equities than they currently do, the demand for fixed income assets will still remain high as the population ages further. A three-year term deposit earns anything between 1 and 10 basis points in Japan.
This combination of an ageing population and high demand for fixed income assets in a low interest rate country shows us why there is demand for high quality interest paying investments in Japan. The fact that the total size of the financial assets held by Japanese households stood at $16 trillion at the end of June 2017, as per Bank of Japan data, gives us an idea of both the conundrum facing Japanese policymakers and the opportunity for Indian infrastructure businesses. To put $16 trillion in perspective: It is approximately seven times India’s GDP.
While Japanese capital is available, it is also discerning. Hence companies need to create robust business models, stable cash flow profiles and corporate governance standards that will satisfy Japanese investors. Over the next two decades, as India looks to create world class infrastructure, structures such as Samurai loans will be needed. As the infrastructure sector gradually recovers, capital structure innovation through channelling Japanese capital into attractive investment opportunities in the years to come will be a must.
(Taponeel Mukherjee heads Development Tracks, an infrastructure advisory firm. Views expressed are personal. He can be contacted at firstname.lastname@example.org or @Taponeel on Twitter)