CLO buyers fill void left by Norinchukin

LONDON, Feb 20 (LPC) - Japanese bank Norinchukin has signalled a saturation in its multibillion-dollar holdings in CLOs, though other investors including pension funds and insurers are ensuring that money continues to pour into the red-hot asset class.

Norinchukin, the world’s largest CLO investor, ceased its buying in the second half of 2019. Its December holdings were ¥8trn (US$72bn), the same level as in June last year, according to the bank’s latest result released early this month.

It’s a stark contrast to the Japanese lender’s rapid buying spree in recent years. It doubled its CLO exposure from ¥3.8trn in a two-year period from March 2018.

The halt came after Japanese regulators raised concerns about high CLO exposure for domestic lenders in March last year. However, Norinchukin, which solely invests in the Triple A tranches of CLO debts, has remained the largest CLO holder, accounting for around 9% of an estimated US$800bn global CLO market.

Norinchukin’s move has not stopped the market growth or deterred other yield-hungry investors. The global CLO market grew almost 7% in 2019, according to Bank of England estimates.

“The sufficient depth of the market allows CLOs to get printed without reliance on Asian investors,” said a London-based fund manager who issued a CLO this year.

Banks are the largest buying group, accounting for 36% of the market, followed by pension funds and insurers, which increased their CLO holdings by 28% last year to US$192bn.


These buyer groups have filled the void in the absence of Norinchukin and have flocked into the safest option, holding Triple A rated and Double A rated tranches of CLO funds as their primary goal is principal protection.

For the majority of banks’ treasuries and pension funds, the current mid-90bp offer of Triple A tranches in Europe and around 120bp in the US are very attractive, amid the low interest rate environment.

“There is a very strong demand for CLO Triple A tranches,” said Laila Kollmorgen, managing director at PineBridge Investments in Los Angeles. “It is our understanding that while US banks and insurers continue to be major buyers, it is a US based asset manager who is taking the entire Triple A in many transactions pricing in January and February.”

It is unclear which are the top CLO holders after Norinchukin as few institutions disclose such information. California Public Employees’ Retirement System, which has invested approximately US$8.5bn in CLOs, is one of few companies that have revealed their CLO holdings.

Other active CLO investors including hedge funds, which normally take more risky equity tranches of CLO debts in exchange for higher returns, doubled their investments in the asset class last year to US$96bn, Bank of England data showed.

Fund managers are optimistic about CLO issuance this year.

Three European CLOs totalling €1.3bn have been printed so far this year, following a post-crisis record in Europe last year with volume of €29.8bn. In the US, around US$4.1bn has been raised so far this year, LPC data showed.

However, a lack of new paper and falling pricing in leveraged loans could put CLO managers under pressure to ramp up the CLOs.

“It’s a challenge to purchase enough good quality leveraged loans at right spreads. With many repricing deals at a cheaper rate, it just very difficult,” said Kollmorgen at PineBridge Investments.

Global leveraged loan refinancing and repricings total US$93bn so far this year, almost double the US$49bn raised in the same period last year, LPC data showed. (Editing by Chris Mangham)