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Takahiko Wada

RPT-In hunt for yield, Japan's banks snap up leveraged U.S. debt

Apr 10 2019

(Repeats for Asia morning readership. No change to text.) * CLO investments among top Japanese banks increase sharply * They buy only senior tranches, say risk managed * Analysts expect holdings to increase amid lack of alternatives * Similar products trigger of financial crisis decade ago By Takahiko Wada TOKYO, April 10 Japanese banks have stepped up investments in highly illiquid, securitised loans, mostly in the U.S. market, as it becomes increasingly difficult to earn decent interest income from conventional products like government bonds. A Reuters survey showed some of Japan's biggest banks, led by Norinchukin Bank , have nearly doubled their investment in collateralised loan obligations (CLOs) in the nine months to December. While the increased exposure brings back memories of similar, complex products made up of subprime mortgages that triggered a global financial crisis a decade ago, banks say they are managing risks carefully. Moreover, analysts expect institutions to continue buying such assets as Japanese investors seek returns amid a zero interest rate environment at home and a shrinking pool of stable, high yield income abroad. "We are controlling risks and returns from our major asset classes -- bonds, stocks and credit products -- by looking at their correlations and with proper checks by our risk control desk," said a spokesman for the Norinchukin Bank, by far the biggest CLO buyer among Japanese banks. CLOs are essentially an investment in a pool of loans to high-risk, low-credit companies. But not all investors share the same return and risk. Those who invest in the "equity" part, typically up to 10 percent of the entire pool, enjoy very high yields but have to take losses from borrowers default first. When defaults increase more than the equity investors can absorb, investors in "junior" tranches are next in line to suffer losses, followed by "mezzanine" tranche holders. The rest, typically about 60-70 percent of the total pool, are called "senior" tranches and normally come with AAA credit ratings because their repayments are at risk only when the other three classes fail to cover losses. That means they suffer losses only when more than 30-40 percent of loans default, an unlikely scenario even under a severe economic downturn, at least based on historical records. All the Japanese banks Reuters contacted said they have bought only AAA tranches. Senior CLOs are attractive because they typically yield about 100 basis points or more above U.S. Treasuries despite their high credit ratings. The hefty yield spread is the premium issuers need to pay investors for holding illiquid assets. "As long as we can earn appropriate spreads, we plan to deal with CLO issues that will be resilient to risks," said spokesman at Sumitomo Mitsui Trust Holdings. The size of securitised debt market shrank after the crisis. In the United States, it fell from over $1 trillion to around $600 billion in 2013. But since then it has gradually recovered to around $800 billion. Market players say CLOs today are considered less risky than the notorious collateralised debt obligations, or CDOs, which caused a massive market shock in 2007-08 after subprime borrowers' default jumped. Regulations have become tighter since then and borrowers in CLOs are companies, whose financial records are easier to analyse for investors, rather than thousands of subprime mortgage borrowers. Still, analysts say they cannot rule out the possibility that CLO prices would fall if an unexpected economic downturn prompted investor panic. "When the economy deteriorates, we could have a vicious cycle of rising funding costs increasing defaults further," said Yukichi Shimosato, market analyst at SMBC Nikko Securities. "And because the CLO market is illiquid, if investors pull out some money, the price of CLOs could fall to extreme levels." Responses from Japanese banks to Reuters' questions about their holdings of U.S. CLOs: Bank Mar 2018 Dec 2018 (billion yen) (billion yen) Norinchukin Bank* 3,800 6,800 MUFG Group** n/a 2,500 Japan Post Bank 496 1,006 Mizuho Bank 400 500 Sumitomo Mitsui 265 305 Trust Sumitomo Mitsui n/a 77 Bank*** *Figures include European CLOs **No March 2018 figure provided. MUFG said outstanding no higher than in 2015 ***No March 2018 figure provided. Sumitomo Mitsui Bank said no major change since March 2018 (Additional reporting and writing by Hideyuki Sano; Editing by Sam Holmes)

In hunt for yield, Japan's banks snap up leveraged U.S. debt

Apr 10 2019

TOKYO Japanese banks have stepped up investments in highly illiquid, securitised loans, mostly in the U.S. market, as it becomes increasingly difficult to earn decent interest income from conventional products like government bonds.

In hunt for yield, Japan's banks snap up leveraged U.S. debt

Apr 10 2019

* CLO investments among top Japanese banks increase sharply * They buy only senior tranches, say risk managed * Analysts expect holdings to increase amid lack of alternatives * Similar products trigger of financial crisis decade ago By Takahiko Wada TOKYO, April 10 Japanese banks have stepped up investments in highly illiquid, securitised loans, mostly in the U.S. market, as it becomes increasingly difficult to earn decent interest income from conventional products like government bonds. A Reuters survey showed some of Japan's biggest banks, led by Norinchukin Bank , have nearly doubled their investment in collateralised loan obligations (CLOs) in the nine months to December. While the increased exposure brings back memories of similar, complex products made up of subprime mortgages that triggered a global financial crisis a decade ago, banks say they are managing risks carefully. Moreover, analysts expect institutions to continue buying such assets as Japanese investors seek returns amid a zero interest rate environment at home and a shrinking pool of stable, high yield income abroad. "We are controlling risks and returns from our major asset classes -- bonds, stocks and credit products -- by looking at their correlations and with proper checks by our risk control desk," said a spokesman for the Norinchukin Bank, by far the biggest CLO buyer among Japanese banks. CLOs are essentially an investment in a pool of loans to high-risk, low-credit companies. But not all investors share the same return and risk. Those who invest in the "equity" part, typically up to 10 percent of the entire pool, enjoy very high yields but have to take losses from borrowers default first. When defaults increase more than the equity investors can absorb, investors in "junior" tranches are next in line to suffer losses, followed by "mezzanine" tranche holders. The rest, typically about 60-70 percent of the total pool, are called "senior" tranches and normally come with AAA credit ratings because their repayments are at risk only when the other three classes fail to cover losses. That means they suffer losses only when more than 30-40 percent of loans default, an unlikely scenario even under a severe economic downturn, at least based on historical records. All the Japanese banks Reuters contacted said they have bought only AAA tranches. Senior CLOs are attractive because they typically yield about 100 basis points or more above U.S. Treasuries despite their high credit ratings. The hefty yield spread is the premium issuers need to pay investors for holding illiquid assets. "As long as we can earn appropriate spreads, we plan to deal with CLO issues that will be resilient to risks," said spokesman at Sumitomo Mitsui Trust Holdings. The size of securitised debt market shrank after the crisis. In the United States, it fell from over $1 trillion to around $600 billion in 2013. But since then it has gradually recovered to around $800 billion. Market players say CLOs today are considered less risky than the notorious collateralised debt obligations, or CDOs, which caused a massive market shock in 2007-08 after subprime borrowers' default jumped. Regulations have become tighter since then and borrowers in CLOs are companies, whose financial records are easier to analyse for investors, rather than thousands of subprime mortgage borrowers. Still, analysts say they cannot rule out the possibility that CLO prices would fall if an unexpected economic downturn prompted investor panic. "When the economy deteriorates, we could have a vicious cycle of rising funding costs increasing defaults further," said Yukichi Shimosato, market analyst at SMBC Nikko Securities. "And because the CLO market is illiquid, if investors pull out some money, the price of CLOs could fall to extreme levels." Responses from Japanese banks to Reuters' questions about their holdings of U.S. CLOs: Bank Mar 2018 Dec 2018 (billion yen) (billion yen) Norinchukin Bank* 3,800 6,800 MUFG Group** n/a 2,500 Japan Post Bank 496 1,006 Mizuho Bank 400 500 Sumitomo Mitsui 265 305 Trust Sumitomo Mitsui n/a 77 Bank*** *Figures include European CLOs **No March 2018 figure provided. MUFG said outstanding no higher than in 2015 ***No March 2018 figure provided. Sumitomo Mitsui Bank said no major change since March 2018 (Additional reporting and writing by Hideyuki Sano; Editing by Sam Holmes)

Tokyo bourse to take over Japan's once-mighty commodities exchange

Mar 28 2019

TOKYO Japan Exchange Group (JPX), owner of the Tokyo Stock Exchange, said on Thursday it would take over the Tokyo Commodity Exchange (TOCOM) to create an all-in-one bourse that would attract more international traders and investors.

Japan to prod regional banks to boost profitability with new rules

Mar 14 2019

TOKYO Japan's financial watchdog will conduct stress tests on regional banks around mid-year and review rules to prod them to speed up efforts to boost profitability, a government official with direct knowledge of the matter said on Friday.

Japan regulatory head scolds weak regional banks: 'Don't blame BOJ'

Aug 22 2018

TOKYO Japan's top financial regulator said regional banks "should not blame the Bank of Japan" for their woes, urging them to explore ways to survive ultra-low interest rates.

Japan tells banks to report suspicious transfers by JVs with North Korea: sources

Jun 22 2018

TOKYO Japan's financial regulator has told the country's banks to report any suspicious money transfers involving 10 Japan-North Korea joint ventures, two people with direct knowledge of the matter said on Friday.

Financial crime task force eyeing binding crypto exchange rules: Japan official

Jun 12 2018

TOKYO International financial crime-fighting group Financial Action Task Force (FATF) will start discussions later this month on introducing binding rules governing cryptocurrency exchanges, a Japanese government official familiar with the matter said on Tuesday.

Japan to urge G20 for steps to prevent cryptocurrency use for money laundering

Mar 13 2018

TOKYO Japan will urge its G20 counterparts at a meeting next week to beef up efforts to prevent cryptocurrencies from being used for money laundering, a government official with direct knowledge of the matter said.

Japan to urge G20 for steps to prevent cryptocurrency use for money laundering

Mar 13 2018

TOKYO Japan will urge its G20 counterparts at a meeting next week to beef up efforts to prevent cryptocurrencies from being used for money laundering, a government official with direct knowledge of the matter said.

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