Nippon Steel raises ¥600bn in convertible bonds

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Nippon Steel has raised ¥600 billion from an offering of bonds that can be converted into stock. japantimes.co.jp

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Nippon Steel raised ¥600 billion ($3.9 billion) this week in a bond sale that can be converted into shares, a record-sized deal for Japan’s convertible market, according to Bloomberg via the Japan Times. Demand was strong enough that the company increased the size from its initial plan, with proceeds earmarked to repay loans taken out for its acquisition of US Steel.

The timing is the point. Japan’s corporate borrowers are being pushed out of the comfortable world of ultra-cheap yen funding just as the country’s rate structure starts to look more like a normal market. The Japan Times notes that expectations of fiscal expansion and further Bank of Japan rate hikes have lifted the cost of conventional debt; the 10-year Japanese government bond yield hit its highest level in almost three decades in January. Against that backdrop, a convertible offers a compromise that plain bonds and bank loans do not: a lower cash coupon today in exchange for giving investors the right—but not the obligation—to take equity later.

For issuers, that “equity later” clause is not an abstract feature; it is a way to refinance at a price that is not yet known. If the stock rises, the conversion option can turn debt into shares and reduce leverage without a cash repayment. If the stock does not rise, the company still gets funding that can be cheaper than unsecured borrowing at a moment when rates are moving up and banks can demand tighter terms. For investors, the product is equally explicit: they accept a lower yield than a straight bond because they are buying embedded upside linked to the issuer’s share price.

The broader implication is that Japan Inc is rebuilding a funding toolkit that was largely unnecessary during the years when central bank policy compressed yields across the curve. As yields rise, financing choices become more about structure than access. Convertibles shift risk from a certain interest bill to a conditional dilution event, and they concentrate attention on equity volatility—because the value of the embedded option depends on it.

Nippon Steel’s use of the proceeds is concrete: the company is paying down acquisition loans tied to its purchase of US Steel. The instrument is also concrete: ¥600 billion of debt that can become stock if the market price makes it worthwhile.