One of the most active investors in Europe’s CLO market may be about to test the loyalty of the managers that provide it with triple-A paper by asking for a higher spread.
Japan’s Norinchukin Bank has been the biggest buyer of the top-rated tranche of European CLOs this year and has invested at a spread 6 basis points lower than the broader buyer base. But managers and arrangers across the market say the agricultural lender plans to hike the interest it seeks on the debt by 3 to 4 basis points for future deals in both Europe and the U.S.
The increase may not sound like much, but the bank’s tighter level has helped those managers on its approved supplier list secure cheaper funding costs during a tough time for the CLO arbitrage, or gap between the money brought in from the loans and the cost of borrowing for a CLO manager.
This shift wider could cause Norinchukin’s approved managers to think twice about working with the Japanese bank, if they can get similar pricing -- and more flexible documentation -- by selling their triple-A tranches to other investors. It could also disrupt pricing in the syndicated CLO market if non-Asian buyers widen their bid for top-rated tranches in response.
Confirmation of these wider levels won’t be available until a deal anchored by Norinchukin prices, however. A spokesman for the bank declined to comment on the possible price move.
More Scrutiny
Norinchukin has anchored the European transactions it invests in this year at 108 to 108.5 basis points--tighter than the 114 to 117 basis spread achieved from the broader investor base--but in return the bank secures a more debt-investor friendly term sheet.
There are several reasons as to why ‘Nochu’ might be considering widening spreads. Some managers say that increased scrutiny of Japanese lenders by regulators this year may have caused the bank to take stock of its exposure to the global CLO market.
In addition, Nochu has the power to set the level where it wants to buy given it’s the largest investor in the European market, according to one manager. This is despite a broadly-held consensus that CLO spreads should tighten, not widen, having lagged the credit market rally this year.
Another European CLO manager said that Nochu’s bid is widening out owing to a combination of factors: the regulatory review, the new financial year and not wanting to be the only bidder in town.
Nochu Needed
Some managers are already looking to broaden their investor base. Credit Suisse Asset Management has previously used an anchor investor for its triple-As, but decided to syndicate the top-rated debt for its latest European new issue among a range of investors.
Helped by better demand as more investors enter the market, the manager priced its AAA tranche at 112 basis points [over Euribor], the tightest level for a syndicated deal this year, and comparable to what Nochu is said to be looking for on its own triple-As.
Other Nochu-approved managers say they are also considering working with the broader market for their next deals, especially if AAA paper can be sold at close to 112 basis points with more manager friendly documentation.
Even with the syndicated option, the European CLO market would struggle to function without the bid from Norinchukin and other Japanese banks. Demand from non-Asian triple-A investors may have increased recently, but managers say it can be patchy and is not sufficient to sustain Europe’s expanding CLO manager base.
Nochu dominated the European new issue market in the first quarter of this year, anchoring 11 of the 16 new issue CLOs for about 2.7 billion euros ($3 billion) of CLO AAA paper, which is over half the 4 billion euros offered, according to data compiled by Bloomberg and based on an average AAA size of 250 million euros.
Across the U.S. and European CLO markets the bank boosted its CLO holdings by 8.8% to 7.4 trillion yen during the first quarter, adding another 600 billion yen ($5.4 billion) to its CLO holdings, but the pace of increase slowed from 19% in the previous three months.
