Country holds nearly 20% of $750 billion market in packaged corporate loans, exposing it to pandemic-related losses.
Japanese regulators have warned the nation’s banks for the first time about the risk of investing in overseas securitized corporate loans, which have run into trouble from a wave of U.S. bankruptcies.
Japan’s banks collectively hold nearly 20% of the $750 billion global market for corporate debt packaged into securities called collateralized loan obligations, according to a report by the central bank and the Financial Services Agency—an outsize portion given that the securities aren’t issued in Japan. More than half the Japanese portion belongs to a single bank, Norinchukin Bank, which manages assets on behalf of farming and fishing cooperatives.
Until recently, the Financial Services Agency, Japan’s main bank regulator, had paid relatively little public attention to the CLO issue. The report released this week was the first time it teamed up with the Bank of Japan for a comprehensive review.
The review said banks’ capital buffers could be dented by investing in CLOs. “Even if they do not intend to sell their investments before maturity, there still is the risk of write-downs if credit ratings on their investments were downgraded, causing huge price fluctuations in the market,” the regulators said. Investment banks slice the CLO debt into different groups or tranches divided by risk, with the least risky portion often given a triple-A or top rating by ratings companies. That appeals to conservatively managed Japanese banks, which want higher yield than they can get at home but have strict rules limiting investment in low-rated debt.
Norinchukin said in May that it had unrealized losses of about ¥400 billion as of March on its CLO portfolio, and its Chief Executive Kazuto Oku said it would refrain from making new investments in CLOs.
Japan Post Bank, which is majority-held by government-controlled Japan Post HoldingsCo., reported CLO valuation losses of ¥122 billion, but it isn’t planning to pull out of the market. “We will monitor developments in the market and carefully look for investment opportunities,” said a Japan Post Bank spokesman. A Mitsubishi UFJ Financial Group spokesman declined to comment on the bank’s CLO valuations or investment stance.
No Japanese financial institution has booked a special loss on CLO investments. Norinchukin said it planned to hold the debt to maturity and that its value could recover, so for now the decline is treated as an unrealized loss. The banks say they have significant unrealized gains elsewhere in their portfolios.
Bank of Japan Gov. Haruhiko Kuroda said in Parliament in late May that he saw no imminent problem with Japanese banks’ CLO investments. “Those held by Japanese banks are highly rated, and risks are managed properly,” he said. The report showed that more than 99% of CLOs held by Japanese financial institutions were rated AAA, compared with 77% for U.S. banks and 50% for U.K. banks.