TOKYO -- Sumitomo Mitsui Banking will issue a debt instrument in Europe backed by Japanese mortgages to counter an adverse interest-rate environment for banks in Japan.
The Japanese megabank aims to raise funds in euros at low interest rates through "covered bonds" by leveraging the creditworthiness of Japanese housing loans.
Covered bonds are debt instruments backed by pools of assets such as mortgage loans. As they remain on the balance sheet of the issuer, they are thought to offer more security than some other types of mortgage-backed debt instruments.
Sumitomo's move comes as Japanese banks are hindered by higher costs obtaining dollars and euros, the rates of which are rising amid the current U.S. rate-hike cycle and fiscal crisis in Italy.
Japanese housing loans enjoy strong creditworthiness thanks to low delinquency rates, making them a viable option for Japanese banks seeking to raise euro or dollar funds. The move by Sumitomo may set a precedence in Japan's financial sector.
Sumitomo has registered the issuance of 20 billion euros worth of the covered bonds with a Luxembourg securities exchange, which aims to initially issue 1 billion euros worth of them. The bonds mainly target European central banks.
The five-year bonds are rated Aaa by Moody's, making Sumitomo the first Japanese private bank to obtain the credit ratings agency's highest rating.
The instrument carries a spread of 0.20 percentage point over market rates. The spread is 0.35 point lower than that given to the five-year bond issued in July by Sumitomo Mitsui Financial Group -- Sumitomo's holding company. Moody's rated that bond A1, the fifth-highest rating.