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September 2023 | Issue 257

Big banks see small changes in CLO holdings — but that may change in third quarter

Hugh Minch
Deputy editor
The major bank buyers of CLO triple A notes saw limited change in their holdings during the second quarter, according to their latest financial statements.
However, sources say Japanese banks have been increasingly active in the primary market over the summer months, which should begin to show up in their statements when they release third-quarter results later this year.
JP Morgan remains the biggest investor in CLOs globally, but saw a small decrease in its holdings between the end of Q1 and Q2. It has $65.62 billion invested in the CLO market, down $300 million from the end of March.
Wells Fargo saw a similar decrease in its holdings ($450 million), while Citi, which reports a figure for all asset backed securities, saw its portfolio increase by $120 million.
US banks have been on the sidelines of the CLO market for most of the past two years owing to the Federal Reserve’s stress tests and, more recently, Basel III requirements. However, that may be changing, according to David Preston, head of structured credit research at AGL Credit Management. He says that recent proposed changes to regulations for both banks and insurers should prove a benefit to the CLO market in the long term.
Bank CLO holdings.svg
* includes all asset-backed securities
“The new insurance risk weightings and bank capital charges favour triple A ratings, and that’s beneficial for triple A-rated structured products generally and CLOs specifically, because there are almost no triple A-rated corporates,” Preston says.
Japanese banks Norinchukin and Japan Post increased the yen value of their CLO holdings in Q2 (from JPY 6.4 trillion to 7.1 trillion for the former and from JPY 2.3 trillion to 2.4 trillion for the latter), but in dollar terms the changes were masked by the 8% drop in the value of the yen during the three-month period.
Nochu in particular has been investing in numerous primary transactions through the summer months, including entering CLOs during reset transactions that it had not participated in originally, a new type of investment activity for the bank.
Sources say it was paid 170 basis points on US CLO triple As at the end of August and 175bp on transactions in Europe.
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Global credit funds & CLO's
September 2023 | Issue 257
Published in London & New York.
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