(Bloomberg) -- Mitsubishi UFJ Asset Management Co. will launch its first fund comprising collateralized loan obligations, heeding the government's call on finance firms to offer products that boost returns for Japanese investors.
The securities, which are bundled leveraged debt, will mainly hold dollar-denominated floating-rate loans made to US companies. The unit of Mitsubishi UFJ Financial Group Inc., Japan's biggest bank, aims to launch the fund in January with a size of several billion yen, according to Kosuke Nagata, general manager of the firm's credit investment division.
"It is extremely important to diversify interest-rate risk within a bond portfolio," Nagata said in an interview. In that regard, being able to offer investors floating-rate assets is a key development, he said.
By buying into debt whose rate moves in line with a benchmark, investors in Japan can reduce their interest rate risk as the country is one of the few places in the world where the central bank is tightening credit. Demand for CLOs has climbed globally this year to record levels, as investors welcome their expected extra returns over regular securities and their variable interest rates.
MUAM, which will be one of the few Japanese financial firms arranging such securities, will target domestic institutional investors such as regional banks that are looking to diversify their asset allocations.
The debt that it's compiling is divided into different repayment priorities such as senior bonds and subordinated debt, and will have various credit ratings. MUAM's first fund will focus on debt with top AAA grades, but it may get into those with AA or lower ratings in the future depending on what clients are seeking.
Rare Issuance
The asset manager is stepping into what's largely uncharted territory for Japanese companies. Lack of experience arranging the complex securities appears to have kept most domestic firms away. There are no official statistics, and Nagata said he's only aware of two or three examples of his domestic peers starting such funds.
Demand from small and medium-sized financial institutions in Japan has begun to rise in recent years because CLOs let them diversify their holdings while often receiving wider spreads than corporate bonds, said Koji Matsushita, chief securitization strategist at Daiwa Securities Co. The risks of holding the securities change with shifts in the economic environment though, so "it's important to understand the structure of the fund and to monitor it closely," he said.
Global CLO issuance totaled more than $320 billion this year as of mid-August, a record high for the period, according to JPMorgan Chase & Co. data. That's a sea change from the 2008 global financial crisis era when demand plummeted for securitized products, dragging down the broader market with them. The CLO market is now worth more than $1.4 trillion worldwide, according to Guggenheim Investments.
In Japan, firms including Norinchukin Bank and Japan Post Bank Co. are also investing in CLOs, with their total holdings reaching around ¥20 trillion ($130 billion).
The risks of holding CLOs came into clear view with the bankruptcies of US auto loan company Tricolor Holdings and auto parts supplier First Brands Group Inc. An exchange-traded fund specializing in CLOs recorded a weekly outflow of more than $500 million in October, marking the first investor exodus in about six months.
Nagata said the First Brands' bankruptcy isn't likely to lead to major risks for the financial sector, but investors are expected to become even more concerned about the governance of leveraged loan issuers.
"It will become even more important to select managers with a highly discerning eye," he said.
--With assistance from Ichiro Suzuki and Gregory Turk.
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