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Glossary

Uridashi

Category — Bond Types
Uridashi bonds are secondary placed Japanese bonds issued outside of Japan. They can be issued in both Japanese yen and foreign currencies, these bonds are intended for Japanese retail investors.

Taking into account the difference in interest rates between foreign and local currencies, the investor receives a higher interest income than if they invested in a conventional bond denominated in Japanese yen. However, in addition to the credit risk of the issuer, the investor also takes the foreign exchange risk, as the foreign currency coupon payments must be exchanged for Japanese yen by the retail investor. If the investor considers it necessary to sell the bond, the sales proceeds must also be exchanged into Japanese yen. If a bond is issued in Japanese yen, it is usually linked to the foreign exchange rate or to an index such as the Nikkei 225.

Secondary placement of bonds in this case means accepting of bids for the purchase of bonds, already issued earlier under unified rules, to 50 or more retail investors. Initially bonds are issued in accordance with uniform documentation such as the Euro MTN programs used in relevant markets outside of Japan. The next step is the subscription and purchase of bonds by non-Japanese underwriters or dealers with further resale to a secondary distributor, which is a Japanese registered securities company. In its turn this company sells bonds to Japanese investors on the secondary market in a day or a little bit later after the closure of the issue.

The evident features of Uridashi are as follows:
a) Documentation for the initial release made outside of Japan is the subject to non-Japanese law.
b) There is usually no Japanese legal advisor assigned to the release organizers.
c) No paying agent is appointed in Japan.

Uridashi first appeared in 1994. Bonds denominated in yen or foreign currencies can be sold in Japan through the secondary market registration and sales contract between Uridashi agent and overseas underwriter. Certain yen bond issuers also issue Uridashi from time to time, such as Korea Electric Power Corporation. Uridashi is effectively used when a high-quality issuer, mostly a corporate one, issues conventional or structured (often equity-linked) financial instruments. The list of used currencies is mainly limited to the currencies of the G7 countries. Nevertheless, the US dollar is losing the ground in popularity to currencies such as the Australian and New Zealand dollars because of the higher yields and stable economic position of these countries. A small part of the securities is issued in euros, the pound sterling and the Canadian dollar are even less used. Several emerging market currencies are also used to issue Uridashi, the most significant of which is the South African rand. Uridashi in Turkish lira also became widespread.

Uridashi bonds became very popular in the 2000s, this instrument is closely related to the so-called carry trade, when borrowing in a currency with a lower yield occurs in order to purchase financial instruments in another higher-yielding currency. Since the mid-1990s, the Bank of Japan has set interest rates extremely low, making it profitable to borrow in Japanese yen and invest in instruments in other currencies. During the 2008 financial crisis, carry trade and bonds denominated in foreign currencies were under fire of criticism in Japan for contributing to the crisis.

Uridashi should be distinguished from so-called Shogun bonds - foreign currency denominated bonds issued and sold in the Japanese market to provide a local financial instrument to Japanese investors interested in purchasing foreign currency denominated bonds. For the first time such a bond was issued in 1985 by IBRD. The main issuers of Uridashi are banks (in particular Barclays, HSBC) and development institutions (IBRD, IADB, African Development Bank).
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