Japan Bank Fuels Global Lending: Wall Street Journal

The Wall Street Journal: Corporate borrowers were in a tough spot for a few weeks in January. Things had been looking up after the December market swoon, but there were problems in a part of the market that serves junk-rated companies. Then Japan’s farms and fisheries came to the rescue. Norinchukin Bank, a 95-year-old bank that holds around $600 billion in deposits from Japan’s agricultural and fishing collectives, has amassed a significant share of the estimated $700 billion global market for CLOs—complex investment vehicles that buy more than half of U.S. loans to junk-rated companies.

The privately held bank’s $62 billion CLO portfolio is larger than either of the two biggest U.S. bank buyers, Wells Fargo & Co. and JPMorgan Chase & Co. And its influence is growing: Norinchukin added about $10 billion to its holdings in the last three months of 2018, nearly a third of all U.S. and European CLO issuance over that period.

Norinchukin is such a force in the market that absence is keenly felt. In January, the leveraged-loan market paused while the bank considered buying big chunks of proposed new CLO deals, according to people familiar with the matter. The loan market didn’t pick up steam until Norinchukin came to the table, allowing big new CLO deals to proceed.

The bank declined to comment. The CLO market has roughly doubled in size since 2014, helping to fuel the growth of corporate debt to historic levels. CLO buyers provide liquidity that allows lenders to continue extending leveraged loans, which companies use to fund everything from debt refinancings to private-equity buyouts. That makes Norinchukin just about as important to a U.S. retailer as it is to a Japanese farmer. In turn, the deposits of thousands of Japanese businesses are closely connected to the financial health of American companies.

These surprising global financial connections have emerged before. The U.S. housing market collapse over a decade ago sunk a group of German state banks betting on subprime mortgages. Investors from Tokyo to California were wiped out when Iceland’s banking system failed in 2008. Norinchukin is hardly a tourist in the credit markets. Its CLO buying goes back at least to the early 2000s, after Japan’s interest rates fell sharply in the 1990s. Norinchukin began seeking out foreign markets in which to invest the billions of dollars its farming clients had amassed selling land to industrial and commercial developers. The bank formed an expertise in complex structured credit offerings, including CLOs.

The bank, which has about $1 trillion in assets, has offices in New York and elsewhere to be closer to the center of the action. Norinchukin employees at U.S. business schools frequently seek internships or other postings at U.S. CLO managers, which decide which loans the vehicles will buy and sell, according to people familiar with the bank.

During the depths of the crisis, many U.S. and European banks scaled back from buying CLOs. But Norinchukin stuck around and continued to invest in the market. The bank is a choosy customer: It keeps a list of roughly 15 to 25 CLO managers with which it will do business, the people said, shunning dozens of others. CLO managers travel to Japan several times a year to visit Nochu, as it is known colloquially, according to people familiar with the business. Getting—and staying—on the list is a priority. From its Tokyo offices, Norinchukin executives email CLO managers highly detailed questions about companies whose loans are held in the funds, according to people familiar with the bank. Failure to respond quickly could damage a manager’s relationship with the bank, the people said. “For a manager to be approved by [Norinchukin], it’s very valuable,” said one CLO market participant. “If the market is choppy, they will be the ones still there.”

Some big U.S. banks have pulled back from the CLO market over the past two years because rising U.S. rates allowed them to make more money elsewhere. But Norinchukin has accelerated its buying. The small yield offered by the highest-rated slices of CLOs is still higher than what it can earn in Japan, where rates remain near zero.

Norinchukin’s purchases represented about 23% of all U.S. and European CLO issuance since the end of the first quarter of last year, according to its disclosures and market figures from S&P Global Inc. It buys the highest-rated slices of the deals.

The CLO market allows Norinchukin to put lots of money to work quickly. The bank can invest $100 million or more in a single deal, an outlay it otherwise would have to spread across many individual bonds and loans.

Norinchukin’s influence on the CLO market has investors fixated on a coming securitization rule change in Japan that could make it more expensive to own CLOs by forcing banks to reserve more capital against their holdings in certain circumstances.

A final rule is expected in March from Japan’s Financial Services Agency. U.S. law firms and lending-industry groups have proposed suggestions for crafting it that would result in a minimal impact on the type of buying that Norinchukin does.
 

Telis Demos covers U.S. capital markets and the securities industry for The Wall Street Journal in New York. Sam Goldfab is a reporter.  Kosaku Narioka also contributed to this article.