(Bloomberg) – Financial chaos in the UK is hitting shores in Japan and shaking up the $1 trillion global market for secured loan bonds.
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Norinchukin Bank, formerly known as the CLO whale, has stopped buying new transactions in the US and Europe for the foreseeable future due to volatility caused 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 break 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 run deep since late September, when then-Chancellor of the Exchequer Kwasi Kwarteng announced the biggest round of unfunded UK tax cuts in half a century. Pension funds have been forced to sell assets, including CLOs, to meet margin calls, flooding the market and making it difficult to price new transactions, the sources said.
A major buyer’s decision to stay away will make new issues even more difficult, they said. Nochu has always acted as an anchor investor, buying all the safest AAA bonds in a particular transaction. 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 pulled out amid regulatory and political scrutiny. It returned to the US market at the end of 2021 and to Europe in recent months, but with a much reduced buy mandate.
Although no longer CLO’s biggest buyer, Nochu has been an important player this year, especially as other investors in the safer parts have pulled out, according to market participants.
The Tokyo-based agriculture, forestry and fishing lender said in May that it would not drastically alter its CLO holdings, although the products’ floating rates make them more attractive in the current environment of rate hike. At the end of June, Nochu’s CLO holdings stood at 6.1 trillion yen ($41 billion), or 11% of its market product portfolio.
The bank’s latest CLO holdings will be disclosed when it announces its fiscal second quarter results in November. The sharp drop in the yen could bolster its holdings when these dollar and euro-denominated assets are converted into Japanese currency for accounting purposes.
(Updates with most recent bank comments and CLO holdings in 8th and 9th paragraphs.)
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