With Japanese interest rates stuck around historic lows, it looks like Japanese pension managers, desperate for yield pick-up, are finally going to bite the bullet and start putting significant money into relatively yieldy property backed securitizations and lucrative but riskier subordinated tranches of ABS deals.
In a move that was welcomed by many people involved in the securitization market in Japan, Sumitomo Trust & Banking Co. became the first to acknowledge that the need to pump up investment returns, combined with the lack of alternative investments, leaves it little choice but to put a portion of the money it manages into such paper.
The company said that starting this month it would invest a total of 10 billion ($94 million) from seven corporate pension plans in real-estate related securitizations, meaning that each pension portfolio would have between 1% and 2% exposure to MBS deals.
While that may be only a small proportion of total investments, the company added that it would increase, depending on available investments and the risk tolerance of each portfolio, to between 5% and 10%.
It also confirmed that it will be investing money from three pension portfolios in subordinated MBS tranches, again in an effort to boost returns.
Experts in Tokyo suggested that other pension managers are likely to follow Sumitomo Trust's example, particularly as the returns of those who don't may begin to look weak compared to companies willing to take the plunge.
Market watchers welcomed the news not just because of the new money that would be made available, but because it is a sign of the increasing respectability of securitization, which has taken off in Japan over the last two years, but was until recently viewed with some suspicion. It also points to increased investor sophistication, sources said.
An ABS expert at J.P. Morgan in Tokyo suggested that one of the main reasons for the decision is likely to be that there are very few alternative investments which offer comparative returns to CMBS, particularly the lower rated tranches.
He was not alone in hailing the decision to invest down the credit spectrum as significant, as this is one area where the Japanese market has lagged until recently.
"Because the Japanese market is relatively young there are still few investors willing to buy subordinated tranches, especially first loss and equity pieces," said a banker at a Western bank in Tokyo. "It looks like things will develop quicker in Japan than elsewhere simply because investors need to find somewhere which gives them a decent return."
The banker added that any investments in lower tranches would be good for the market as placing equity pieces increases the efficiency of the market and often makes deals cheaper for originators.