Top Japanese Corporate Loan Investor Reduces US Purchases

Japan's largest buyer of corporate loans in the US cut its holdings in the last quarter for the first time in over a year after becoming more selective about buying credit products, people with knowledge of the matter said.

Norinchukin Bank is increasingly demanding about investing in secured loan obligations for better returns, people said, asking not to be identified because they are not allowed to talk about the policy. As a result, its holdings fell slightly at the end of September by 8 trillion yen ($ 73 billion) in June, they said, without giving a number.

The agricultural lender has been accumulating the highest-rated US and European CLOs to offset lower home interest rates, making him a major investor in the $ 750 billion global market. The first signs of the downturn came in the second quarter after Japanese officials tightened the rules and increased scrutiny of banks' investments, Bloomberg said.

Norinchukin's drop in exposure was due to the volume of products overdue in excess of purchases during the quarter, at a time when attractive new deals were lacking, people said. The bank plans to continue investing in the coming quarters, they added.

Another reason Norinchukin is not rushing to build its stakes in CLO is that it wants to maintain diversity in its $ 586 billion asset portfolio, one person said. Its investments are spread over bonds, stocks and credit products, and CLOs now account for about 13% of the total.

The Tokyo bank "will continue to invest cautiously as it examines the return on risk," a spokesman said, while declining to comment on its CLO activity for the quarter ending September 30.

Norinchukin is expected to disclose its latest stakes in CLO by announcing its quarterly financial results at 21 in November. The balance increased for five straight quarters, more than doubling from ¥ 3,8 trillion in March of 2018.

Earlier this year, Norinchukin's CLO purchases were critical in the US and Europe after the leveraged lending market took hold in December. The bank later reduced purchases in the US and Europe in the second quarter, Bloomberg said. There is a difference between when banks agree to CLO offers and reserve them.

Despite Norinchukin's reduced activity, the US CLO market has been solid for most of 2019. The new issuance surpassed $ 100 billion and only follows last year's record pace of $ 13 billion, even after the third quarter's decline, according to Bloomberg data.

New emissions could fall to about $ 80 billion to $ 90 billion next year, Nomura Holdings Inc. analysts said last week. Spreads for AAA-rated products can tighten modestly, they said.

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

The country's Financial Services Agency introduced a risk retention rule in March that imposes conditions on purchases of parties that do not hold interest in loans.

Japanese banks now hold about 15% of outstanding CLOs worldwide, estimates the BOJ in its financial system report. Despite the danger of a fall in prices, the risk of default on AAA-rated tranches is "basically small," he said.

Source: Bloomberg

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