(Bloomberg) — Financial chaos in the UK is hitting the shores of Japan and roiling the $1 trillion global market for collateralized loan obligations.
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Norinchukin Bank, once known as the CLO whale, has stopped buying new deals in the US and Europe for the foreseeable future because of volatility sparked by UK pension funds, according to people familiar with the matter, who asked not to be identified because they’re not authorized to speak publicly. The move is likely a pause rather than a permanent exit, they said.
A spokesperson for Norinchukin Bank, also called Nochu, said the lender does not comment on individual transactions.
Volatility has been profound since late September, when then-Chancellor of the Exchequer Kwasi Kwarteng announced the UK’s biggest set of unfunded tax cuts in half a century. Pension funds were forced to sell assets including CLOs to meet margin calls, flooding the market and making it difficult to price new deals, the people said.
The move by an important buyer to stay on the sidelines will make new issuance even more challenging, they said. Nochu historically acted as an anchor investor, buying all of the safest AAA bonds in a particular deal. CLOs are created by repackaging leveraged loans into bonds with varying levels of risk and return.
‘Whale’
The Japanese lender dominated the CLO market until 2019, when it exited amid regulatory and political scrutiny. It returned to the US market in late 2021 and to Europe in recent months, but with a much reduced purchasing mandate.
Though no longer the biggest buyer of CLOs, Nochu has been a significant player this year — especially as other investors in the safest portions stepped away, according to market participants.
The Tokyo-based agriculture, forestry and fisheries lender said in May it won’t drastically change its CLO holdings, though the products’ floating rates make them more attractive in the current rate hike environment. As at end-June, Nochu’s CLO holdings stood at 6.1 trillion yen ($41 billion), making up 11% of its market products portfolio.
The bank’s latest CLO holdings will be disclosed when it announces its fiscal second quarter results in November. The yen’s sharp fall could boost its holdings when these dollar- and euro-denominated assets are converted to the Japanese currency for accounting purposes.
(Updates with bank’s most recent comments and CLO holdings in 8th and 9th paragraphs.)
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