JP Morgan leads bank investors in CLOs with $63.44 billion

Hugh Minch

Senior reporter

JP Morgan was the only big US bank holder of CLO notes to meaningfully increase its investments in the third quarter of 2022, adding $9.84 billion according to latest financial statements. It held $63.44 billion of CLOs on 30 September, up from $53.6 billion at the end of June.

Japanese buyers also made additions to their CLO holdings. Norinchukin Bank increased its holdings by JPY 500 billion ($3.46 billion) in the quarter, expanding the CLOs on its books to JPY 6.6 trillion ($45.61 billion) by quarter end. That figure is likely to decrease in the future after the bank pulled back from the primary market in Q3, leaving a number of CLOs without an anchor investor.

Japan Post Bank added a similar amount, growing its books by JPY 419.7 billion ($2.9 billion) to JPY 2.2 trillion ($13.97 billion) overall.

Rounding out the big five, Citi (CLO and ABS holdings up to $30.33 billion) and Wells Fargo ($33.09 billion) saw minor increases in their CLO investments.

With triple A notes offering a total all-in yield of around 7% at year-end, market participants are hopeful that major buyers will make a return to the CLO primary market.

“Some of the historically typical triple A investors have come back”

Tricia Hazelwood, International head of securitised products | MUFG

“We’ve started to see some of the historically typical triple A investors come back and new ones join,” says Tricia Hazelwood, international head of securitised products at MUFG. “The new investors are not the multi-hundred million dollar participants, but there’s been more diversification in the triple As.”

US banks have been largely absent from the primary CLO market through 2022 following the Federal Reserve’s stress test rules, which meant banks were forced to increase their capital requirements by 80 to 100 basis points compared to a year prior.

The return of US banks on a large scale would likely be a trigger to pull triple A spreads tighter. First-pay debt tranches priced at tights of 220bp in November and wides of 270bp.

“We feel there are a lot of triple A investors trying to come online — several that have already and more that are looking,” says Jamil Nathoo, managing director for business development at MidOcean Credit Partners.

“Given they’re virtually indestructible, it’s an incredible return for triple A risk. In 2023, especially once we get through the pipeline of warehouse securitisation, we expect demand for triple As to increase.”

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Global credit funds & CLO's

January 2023 | Issue 251

Published in London & New York.