Known primarily as a lender to agricultural, fishing and forestry co-operatives, Norinchukin Bank has been hailed by some as the unlikely saviour of the leveraged loan market. Others, however, are more worried about what might happen if it departs the scene.
There was a temporary collapse in leveraged loan activity in December, followed by a recovery in January. Just as the market looked like it might dry up, in stepped the Japanese bank to gobble up pretty much any AAA-rated slice of CLOs. “Thanks to Norinchukin, the CLO market is open,” one underwriter at an international bank told us. And, as the largest buyer, it’s this market that provides the fuel for the leveraged loan market.
So what’s attracting the lender, often referred to as NoChu, to the market? The main reason is decades of negative interest rates in Japan, which have forced the country’s banks to search elsewhere for yield. NoChu is not the only Japanese bank to have turned to CLOs, but it has become the most dominant – accounting for $62 billion of global CLO holdings by the end of last year, according to S&P Global.
Although it might be assumed there would be no lack of willing takers for AAA-rated paper, market players tell us appetite is more easily sated for BBB and BB tranches. AAA, says one, “is the trickiest to place”, largely due to the sheer volumes. Pricing its deals almost uniformly at 108 basis points over LIBOR (compared with the 114-116 typical of other buyers in Europe), NoChu has CLO issuers waiting in line to bring it deals.
This kind of power is not welcomed by everyone. NoChu can dictate terms and timeframes. Some say its vanilla approach militates against diversity as some types of CLO become marginalised. Perhaps the biggest worry is the impact on the market should NoChu decide to withdraw. When another Japanese CLO buyer, Japan Post, decided to focus on Europe rather than the US towards the end of last year, the decision reportedly had a material effect on the US secondary market. Though a significant player, Japan Post’s CLO exposure is significantly less than NoChu’s.
There was speculation that Japan’s financial regulator might force withdrawals from the market. Concerned about risks associated with exposure to complex debt products, it suggested it was inclined to insist on the application of risk retention for Japanese institutions investing in CLOs. Not a problem in Europe, where everyone has to abide by those rules, but potentially a big problem in the US, where trade body pressure resulted in an exclusion from the rules for US CLOs.
The FSA subsequently insisted only that thorough due diligence be undertaken and a comprehensive understanding gained of CLO managers’ processes. Japan’s exit from the US leveraged loan market appears to have been averted – for now, at least. But it has brought into focus the narrow buying base for leveraged loans on both sides of the Atlantic.