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No return seen in euro CLOs for Norinchukin

By Owen Sanderson
12 Feb 2020

Even after the Japanese financial year-end at the end of March, Norinchukin Bank is unlikely to return to the European market as an anchor investor in senior CLO tranches, according to a CLO manager with knowledge of the bank’s approach.

At the beginning of 2019, the Japanese agricultural bank was one of the only senior investors in the market and was willing to buy triple-A CLO tranches at least 5bp tighter than where other investors were pricing the bonds.

However, its outsizerole drew increasing scrutiny, including from the Japanese regulator, which launched an investigation into the bank’s holdings, and it stopped buying. Other Japanese banks, including Japan Post Bank, were also active but on a smaller scale than Norinchukin.

Some CLO managers and investors, though, hoped and expected Norinchukin to return in the new Japanese financial year beginning in April.

The bank is said to be meeting managers on its list in London this week, according to the manager, as part of the monitoring of its portfolio, and making it clear that it will not be coming back to the primary market.

Another CLO manager blamed press attention for NoChu’s continued absence from the market.

Regulatory filings from last year show that big banks in other jurisdictions had taken up some of the slack. JP Morgan’s 10-Q disclosures, which run to the end of September 2019, showed a big increase in its exposure to the CLO market, with $27.42bn in CLO exposures, compared with $19.61bn at the end of 2018.

Barclays’ global CLO outlook, published in December, estimated that Japanese banks hold 15% of global CLO tranches outstanding.

“We expect this trend to continue, with Japanese investors still purchasing AAA tranches, as it is hard to find relative value to replace CLOs, but to a lesser degree than in years past as headline and regulatory pressure remains high.”

The research team at Barclays, led by Geoffrey Horton, suggests that European bank demand replaced some of the Japanese bid in 2019, encouraging more broadly syndicated CLO senior bonds.

CLO senior tranches have moved tighter in euros, with the latest crop of senior notes printing at 95bp over Euribor, but still offer relative value compared with most other triple-A investments, with the Euribor floors continuing to give an extra spread kicker.

The next round of CLOs may come tighter still, as CLO liabilities start to tighten in following a wave of repricing in underlying leveraged loans.

By Owen Sanderson
12 Feb 2020