UK firms have yen for cheap cash

BRITISH companies and banks are taking advantage of Japan's record low interest rates to borrow money in Tokyo almost for free.

Tesco and Alliance & Leicester have just completed £250m-worth of Japanese bond issues. The most either will pay for its yen is 1% per year.

Tesco has borrowed the equivalent of £110m by selling yen bonds due in five-and-a-half years. They should help fund its £140m acquisition of the Japanese convenience store chain C-Two Network.

Although the bonds' 1% interest rate is low by UK standards, it is almost twice as much as investors can get on similar Japanese government bonds. Comparable gilts yield about 4.75%.

Alliance & Leicester has borrowed £135m by selling two-year yen bonds to Japanese investors. Its bonds pay the same interest rate as banks charge each other to borrow yen for three months - currently as little as 0.06138%. The equivalent rate to borrow pounds for three months is 3.7525%.

But as this interbank rate is a variable rate, the bonds could pay more interest in the future or less, if Japanese interest rates fall further, although this is less likely.

Unlike Tesco, Alliance & Leicester has no obvious need for yen. It will have to use financial engineering to end up with pounds it can lend in the UK. That increases its real cost, but it should still be better off than if it had borrowed at home.

HBOS and Northern Rock have also raised money cheaply by selling bonds in Tokyo recently.