TOKYO — Bonds backed by payment streams for items like smartphones have surged in Japan thanks to investors hungry for higher yields, while the country’s ultralow interest rates encourage a wider scope of securitized products.
About 700 billion yen ($6.2 billion) in bonds backed by consumer payment receivables were issued from April through October, according to Mizuho Securities. That pace would exceed the record of roughly 1.19 trillion yen issued in 2017.
The bonds are issued by businesses that sell products under installment plans. That debt is then securitized by a trust bank and sold to institutional investors.
These types of bonds have been spurred by installment plans for smartphones. SoftBank Group issued over 200 billion yen in bonds entering fiscal 2018 backed by payments for expensive smartphones like the latest iPhone, which costs 180,000 yen here. These purchases can be paid off in periods of up to 48 months that are tacked on to monthly service charges.
Securitization lets companies turn payments owed by customers into cash quickly. Typical installment plans bear interest plus the recovery of the entire principal, but collection takes time. Bundling these plans and selling them to investors for cash allows companies to use their capital better, even after securitization costs.
The issuing company also enjoys low interest rates because it bears some of the risk for late payments, which decreases the likelihood of default for investors. These bonds also carry higher investment grades than regular corporate bonds.
Yet issuance also has surged because these financial products still generate higher yields than Japanese government bonds as ultralow interest rates persist, making them popular with institutional investors.
Long-term interest rates have fallen to around 0.1% from about 0.5% in 2013, when the Bank of Japan embarked on a massive monetary easing program. And while U.S. Treasury yields are recovering, the spread with JGBs makes it expensive to procure dollars.
“There is strong interest from financial institutions and other investors because positive yen-denominated yields can be earned over a fixed period,” said Takenobu Nakashima of Nomura Securities.
The scope of assets up for securitization appears likely to continue growing. Bonds backed by payment plans for home renovations are increasing as seniors make their residences free of barriers.
“Many people are paying in installments to remodel their elderly parents’ home,” a finance company said. “That is apparently connected to the bond issues.”
Any expensive product can be securitized. Payments for luxury watches are part of the trend. Installment-plan sales of high-performance computers used in e-sports are brisk, which could lead to securitization, a domestic finance company said.
The value of complex securitized products sank after the 2008 financial crisis, and doubt from investors froze financial markets. But low interest rates are leading to a rebound in these intricate financial products, with comparatively little risk at present that bonds backed by such purchases will become a concern.