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News
Japanese banks and insurers appreciate stability of CLOs and increase investment
by Lisa Lee
Big banks. Regional banks. Life insurers. From one end of the country to the other, Japan is seeing a resurgence of interest in the global CLO market.
The Japanese are not alone. They are joining a broadening swath of investors flocking to CLOs in both the US and Europe.
“There’s been strong appetite from CLO triple A investors around the globe,” said Dan Ko, portfolio manager at Eagle Point Credit. “There are people eager to buy more, and new entrants.”
Japanese life insurers Meiji Yasuda and Aioi Nisay Dowa are exploring whether to invest in CLOs, Creditflux previously reported. Both are meeting with CLO managers to learn about the asset class. Dai-Ichi Life Insurance is buying static CLOs, and Sumitomo Life is pursuing private credit CLOs that yield a premium to BSL deals, according to sources.
The two big traditional buyers — Norinchukin Bank, known as Nochu, and Japan Post — are ramping up their purchases. Shinkin Central Bank is among those gearing to take more triple As. Mizuho Bank is looking to return to purchasing CLOs after years on pause, though other parts of Mizuho have been buying and trading the securities.
Japanese buyers have to contend with the strong dollar and the weak yen when buying CLOs. “The dollar inflates Japan’s US CLO exposure,” said Serhan Secmen, global head of CLO business at Napier Park Global.
The basis swap has moved in favour of Japanese CLO triple A investors
Dan Ko
Portfolio manager
Eagle Point Credit
Nochu, for example, reported a significant hike in its CLO holdings as the weakening yen ballooned its CLO portfolio to JPY 7.4tn by March 2024 from JPY 6.4tn a year earlier, according to a filing. Nochu’s increased buying in the past few months is mainly driven by the desire to keep invested, sources said.
For their pain, investors are being kept awash in cash distributions and seeing realisations — a rarity for buy-and-hold investors at the moment.
The hectic pace of CLO resets and refinancing, especially in the US, which set a fresh record for monthly issuance in May, is returning a flood of cash to deploy again. CLOs are also liquidating and amoritising.
“We are in this virtuous cycle of refinancings that’s providing liquidity to triple A investors,” said Mike Herzig, head of business development at First Eagle Alternative Credit. “Japanese investors have had a lot of runoff. They will need to invest to maintain their exposure.”
While some traditional Japanese investors are hiking allocations to maintain their holdings, others are trying to increase their portfolios, said market sources. They are attracted to CLOs given the prospects for a higher-for-longer rate environment. An improving economic outlook also suggests that the underlying leveraged loans could avoid a default cycle that could have resulted in painful credit downgrades.
“Most investors, including the Japanese, prefer floating-rate assets,” said Secmen.
However, Japanese investments are still paltry compared to those of years past, when Japanese investors, notably Nochu, dominated the CLO landscape. At one point Nochu bought nearly half of all triple As the market created. This brought political and regulatory scrutiny, and caused the bank to pull back from CLOs in 2019.
Nochu eventually returned in a subdued manner. No longer was it the whale that determines the dynamics of the CLO market.
The Japanese are now important among other sizeable investors, including a growing amount of ETF cash. But their buying can be sporadic. “The Japanese really know the CLO market. They tend to come in when things look stable, and the underlying debt is stable right now,” added Herzig.
There’s also been some respite from challenging exchange rates. Europe has begun to cut interest rates and the US is expected to join soon.
“The basis swap has moved in favour of Japanese CLO triple A investors,” said Ko.
