(Bloomberg) -- A Japanese borrower that was hit by a record loss is marketing a yen bond deal at the widest spread for corporate hybrid debt this year in a key test of appetite as interest rates creep higher.
Sumitomo Chemical Co. plans a ¥100 billion ($700 million) hybrid bond sale on Friday at 280 basis points over Japanese government bonds, twice the spread on jumbo subordinated debt deals by Takeda Pharmaceutical Co. and Nippon Steel Corp. in June. Premiums on those offerings were considered generous at the time and came before the Bank of Japan’s surprise rate increase late July.
The closely-watched deal comes as the chemicals company returns to profit after a ¥312 billion net loss last fiscal year. The Tokyo-based firm is one of a slew of Japanese issuers that face call dates this year and next on hybrid debt, which is riskier and more expensive to sell than regular corporate bonds, but allows issuers to raise funds without affecting their credit ratings.
“It’s the first deal that lets the market test risk tolerance since volatility increased” after the rate hike, said Shunsuke Oshida, head of credit research at Manulife Investment Management Japan.
In Japan, sales of subordinated debt - which are repaid after senior bonds in a credit event, and have some features of equity - have risen 34% to a three-year high of ¥2.68 trillion this year so far, according to data compiled by Bloomberg. Textile company Toyobo Co. also plans to sell a subordinated bond with a hefty spread on Friday.
Sumitomo Chemical intends to use the funds to refinance its hybrid note sold in 2019, which has a call date coming up in December. The new bond has a 35-year maturity, and is callable after five years.
The company posted a net profit of ¥24.4 billion in the first quarter. Its plan to sell about $702 million of shares in Rabigh Refining & Petrochemical Company to Saudi Aramco, is a “positive factor”, said Japan Credit Rating Agency Ltd., which rates the company A+ with a negative outlook. Sumitomo Chemical’s struggling drug unit Sumitomo Pharma Co. also cut cut jobs at its US subsidiary. Separately, it announced in July a plan to reduce payroll in Japan.
The offering will also gauge appetite in the credit market as the BOJ keeps further rate hikes in play. Spreads on bonds in the Nomura BPI index are at 39 basis points, having increased on Tuesday for the first time since late March.
