Japanese investors and ETFs bid up CLO triple As as US banks cool off

Hugh Minch

Senior reporter

CLOs saw healthy demand from Japan in the first three months of the year, with Japan Post Bank and Norinchukin each increasing investments in the asset class. Japan Post’s CLO holdings stood at JPY2.3 trillion ($17.51 billion) as of 31 March, an increase of $550 million in the quarter and up 32.7% on the year prior. Nochu added $110 million to JPY6.4 trillion ($48.2 billion), or 13% of the bank’s investment portfolio.

JP Morgan, which remains the CLO market’s largest noteholder, decreased its investments in the first quarter by $1.29 billion to $65.92 billion, while Wells Fargo held $33.02 billion, a decline of $160 million. Citi, which posts its total ABS holdings without differentiating for CLOs, added $1.37 billion in Q1 to hold $31.26 billion.

Speaking at the LSTA and DealCatalyst conference in May, Edwin Wilches, co-head of PGIM’s securitised products team, said that the major US banks are not out of the market completely, but are not as powerful as in 2021, when they accounted for 75% of triple A paper sold.

“My guess is that it will take time for these buyers to come back, and it is unclear if they’ll ever come back as big as they once were,” Wilches said. “There’s more appetite from Tokyo, and more from retail as the ETF market gets going.”

Primary CLO triple A spreads looked similar in May to the earlier months of this year. The latest transaction from GoldenTree matched the tightest print of 2023 at 175 basis points plus Sofr, while other deals challenged for the year’s widest print. Most CLOs have syndicated triple As in 2023 rather than place their first-pay tranches with an anchor investor.

A research paper from Barclays, published in June, found that primary market triple A paper is more attractive than secondary opportunities in the current market. Primary CLO triple As averaged 205bp, while the secondary market saw spreads averaging 193bp.

Barclays also found that while CLO triple As outperformed corporates in May, its projections show this trend reversing in the near term.

“We believe that corporates, which have been underperforming CLOs in 2023, will likely outperform in the near term as investors shift their focus back to fixed coupon products in light of the rising possibilities of a cut in interest rates,” said Barclays analyst Keyur Vyas.

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Global credit funds & CLO's

June 2023 | Issue 255

Published in London & New York.