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Japan’s Biggest CLO Investor Cools on $750 Billion Market

Taiga Uranaka and Yuki Hagiwara
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Japan’s Biggest CLO Investor Cools on $750 Billion Market

(Bloomberg) -- Japan’s biggest buyer of bundled U.S. corporate loans pared its holdings last quarter for the first time in more than a year after becoming more selective about purchasing the credit products, people with knowledge of the matter said.

Norinchukin Bank is getting more picky about investing in collateralized loan obligations to obtain better returns, the people said, asking not to be identified because they’re not authorized to speak about the policy. As a result, its holdings fell slightly at the end of September from 8 trillion yen ($73 billion) in June, they said, without giving a figure.

The agricultural lender has been piling into top-rated U.S. and European CLOs to make up for rock-bottom interest rates at home, making it a major investor in the $750 billion global market. First signs of the pullback came in the second quarter after Japanese authorities tightened rules and increased scrutiny of banks’ investments, Bloomberg has reported.

Read a QuickTake Q&A on why CLOs are sparking concerns

The drop in Norinchukin’s exposure was due to the volume of products maturing exceeding the amount of purchases during the quarter, at a time when there was a lack of attractive new deals, the people said. The bank plans to keep investing in the quarters ahead, they added.

Another reason why Norinchukin isn’t rushing to build up its CLO holdings is that it’s keen to maintain diversity in its $586 billion asset portfolio, one of the people said. Its investments are spread across bonds, stocks and credit products, and CLOs now make up about 13% of the total.

The Tokyo-based bank “will continue to make investment with caution while examining risk-returns,” a spokesman said, while declining to comment on its CLO activity in the quarter ended Sept. 30.

Norinchukin is expected to disclose its latest CLO holdings when it announces quarterly financial results on Nov. 21. The balance has risen for five straight quarters, more than doubling from 3.8 trillion yen in March 2018.

At the start of the year, Norinchukin’s CLO purchases were critical in both the U.S. and Europe after the leveraged-loan market seized up in December. The bank later cut back purchases in the U.S. and Europe in the second quarter, Bloomberg has reported. There tends to be a lag between when banks agree CLO deals and book them.

Despite Norinchukin’s reduced activity, the U.S. CLO market has been solid for most of 2019. New issuance has surpassed $100 billion and only trails last year’s record pace by $13 billion, even after the number dropped in the third quarter, according to Bloomberg data.

Fresh issuance may drop to around $80 billion to $90 billion next year, Nomura Holdings Inc. analysts wrote last week. Spreads for AAA rated products may tighten modestly, they said.

Japanese authorities have been paying closer attention to investment in CLOs amid concerns about the quality of the underlying loans, which are typically made to highly indebted companies. The Bank of Japan said last month that the ratings and market prices of even top-rated CLOs held by Japanese banks “could fall substantially” if economic and market conditions change significantly.

The nation’s Financial Services Agency introduced a risk-retention rule in March that places conditions on purchases from parties that don’t keep a stake in the loans.

Japanese banks now own about 15% of outstanding CLOs globally, the BOJ estimated in its financial system report. Despite the danger of a drop in prices, the risk of defaults in AAA rated tranches is “basically small,” it said.

(Updates with Nomura estimate for CLO issuance in the 10th paragraph)

--With assistance from Lisa Lee and Sarah Husband.

To contact the reporters on this story: Taiga Uranaka in Tokyo at turanaka@bloomberg.net;Yuki Hagiwara in Tokyo at yhagiwara1@bloomberg.net

To contact the editors responsible for this story: Marcus Wright at mwright115@bloomberg.net, Russell Ward

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