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Derivatives

Japanese Bank Mulls Credit Debut

Japan's Hiroshima Bank, with over USD44 billion in assets, is looking to invest in credit derivatives such as credit-linked notes and synthetic collateralized debt obligations. "We're now studying this," said Masakai Monden, manager of the investment department in Tokyo. He continued that the bank will likely invest in up to two or three synthetic CDOs next year, in increments of between USD10-40 million. "We'll look at it on a case by case basis," he explained. Hiroshima Bank will prefer a CDO structured on Japanese credits as it is more familiar with the companies.

Monden added that the bank will probably make its first investment in six months, when he expects internal accounting procedures to change relating to mark-to-market accounting, which will then allow him to invest in credit products. He declined comment on the size of the bank's investment portfolio.

"So we can invest in highly rated products while receiving enhanced yield," said Monden, commenting on why it is considering CDOs. Hiroshima will look to invest in tranches AA or higher. Monden noted that several foreign banks are currently showing him credit products but declined to elaborate. Important investment factors for the bank are pricing, product rating and the counterparty's rating, which must be AA or higher, according to the bank's mandate.

"It's interesting that regional banks are beginning to eye this product," said a credit structurer in Tokyo, adding that it shows an expanding range of end-users are considering the products.

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