Japan’s hunger for Europe CLOs shows no signs of abating

Bloomberg

A Japanese lender has this year bought the lion’s share of top-rated bonds that are backed by pools of European corporate loans, propping up the region’s market for collateralised debt obligations amid a very difficult first quarter.
Norinchukin Bank, starved of yields thanks to Japan’s negative interest rates, is expected to keep buying AAA-rated tranches in Europe until at least the summer, even as Japanese authorities scrutinise how the region’s financial institutions operate in the global CLO market.
“The Japanese bid for AAAs remains strong and there are no signs of them pulling back anytime soon,” Aza Teeuwen, a portfolio manager at TwentyFour Asset Management LLP, said in a March 20 client note. He added that equity investors need this bid at the moment “as arbitrage is far from ideal.”
This has provided a boon to those managers able to bank on the certainty of selling the biggest slice of bonds from their CLO. Consequently, Norinchu-kin’s participation has kept deal flow moving in Europe, helping arrangers to clear away the backlog of older, uneconomical vehicles from their balance sheets. A spokesman for Japanese lender declined to comment on its investment policy.

THICK AND THIN
10 out of this year’s 15 new issues have been anchored by Norinchukin Bank, equating to a 66% percent hit rate in the first quarter. This follows a particularly active second half for the bank. But without the bank’s investments European managers would have struggled even more to print deals this quarter. New issue spreads at the top of a vehicle’s liability stack would undoubtedly be higher, putting yet more pressure on managers looking to balance funding costs with cashflows from the underlying loan assets.
The advantage of “Nochu” is that it is there throughout the cycle, according to a London based CLO manager.
The entry of Japanese banks into Europe a little over three years ago marked an expansive phase of the post-crisis market for CLOs. From roughly 14 billion euros ($15.8 billion) in 2015, supply soared to 20 billion euros in 2017 and reached almost 28 billion euros last year, according to data compiled by Bloomberg.
Norinchukin works with a pre-approved list of managers, providing all or almost all of the AAA tranches for these issuers at a predetermined price. That list has expanded recently to as many as 16 of the region’s 46 issuers. 10 of those are said to have tapped into the investor during the first quarter to anchor their AAA-rated paper, amounting to roughly 2.5 billion euros based on an average AAA tranche size of 250 million euros.
These managers benefit from being able to lock in the coupon on the triple-A rated tranche ahead of pricing to protect against any volatility, as well as securing liability costs that are inside spreads offered by other investors.