2008-10-27 03h56 :: Bloomberg.com : Kaupthing is Samurai Bonds' First European Defaulter

Kaupthing is Samurai Bonds' First European Defaulter (Update1)

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aChQ_RUkxNnw

By Takashi Ueno and Oliver Biggadike

Oct. 27 (Bloomberg) -- Kaupthing Bank hf today became the first European borrower to default in Japan's samurai bond market after the state-controlled bank missed its last chance to make a 450 million yen ($4.8 million) coupon payment.

Two holders of the Reykjavik-based bank's 50 billion yen in 1.8 percent notes, who declined to be identified, said they didn't receive funds that were originally due on Oct. 20. Kaupthing had a one-week grace period to make its payment, according to terms in the notes' sale prospectus.

The default indicates Kaupthing, seized by Iceland's government on Oct.9 as the nation's financial system failed, may not honor all of its $26.6 billion in outstanding bonds. It may also erode investor confidence in a market that until last month was one of the few thriving sources of financing for U.S. and European issuers amidst the global credit slump.

``The issuing environment in the samurai market is likely to remain bad for a while as concerns about issuers that are heavily reliant on banking and overseas capital strengthen,'' said Tetsushi Nagato, a credit analyst at Schroder Investment Management Japan Ltd.

Kaupthing's default comes after Lehman Brothers Holdings Inc. roiled the samurai bond market by defaulting on its yen notes in the wake of a Sept. 15 bankruptcy filing. Yields on Kaupthing's samurais jumped as high as 45,000 basis points over the one-year yen swap rate this month as investors dumped the securities on expectation of default.

Foreign Borrowers

Samurais are yen-denominated bonds sold in Japan by foreign issuers. A basis point is 0.01 percentage point.

In addition to the 1.8 percent notes Kaupthing has 28 billion yen in samurais outstanding, data compiled by Bloomberg show. They have also defaulted, according to the terms of their sale prospectus.

``If there is a payment investors will be informed via the Japan Securities Depository Center,'' Chika Togawa, spokeswoman at Sumitomo Mitsui Banking Corp., the fiscal agent for Kaupthing's samurai notes, said in a phone interview today. She declined to elaborate. Jonas Sigurgeirsson, Kaupthing's spokesman in Reykjavik, didn't respond to calls to his office outside normal business hours.

Iceland's Financial Supervisory Authority on Oct. 22 separated Kaupthing's domestic and international operations, limiting the government's liability on the bank's foreign debt.

``An independent evaluation of the value of assets and liabilities, together with a final settlement, will be made within the next 90 days,'' the FSA said.

Japan's Rating and Investment Information, Inc., on Oct. 22 said the outlook for Kaupthing's foreign debt repayments is bleak.

``The payment of foreign currency debts including Japanese yen bonds are subordinate to that of foreign currency deposits and secured debts,'' the credit rating company said. ``Proceeds from the transfer and disposal of foreign assets to repay bonds are expected to be far below the book value.''

Last Updated: October 27, 2008 03:56 EDT