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December 16, 2016  

Chinese Buyers Scoop Up American CLOs

At least two institutions in China recently bought U.S. collateralized loan obligation securities on the new-issue market for the first time.

Sources identified one of the investors as a bank. They pegged the other as an investment firm, possibly Fosun International of Shanghai.

The activity immediately stirred up talk that a long-developing bid from China-based CLO buyers finally is materializing. Indeed, issuers said they recently have met with a mix of institutions in the country about entering the trade.

They also have spoken to insurers in Korea and banks in Japan, including some that already are buyers but could enlarge their allocations. Sources said the newcomers are poised to take entire tranches of securities with single-A and double-A ratings, and could move into triple-A products as participation broadens. “CLO interest is on fire in China,” one U.S. investor said. “The banks are eager buyers, and more Korean insurers are also very hot to get into the market. These are new buyers, and they do wonders for a market.”

The bank that just got into the market is described as a tier smaller than the largest state-owned entities: Agricultural Bank of China, Bank of China, Bank of Communications, China Construction Bank and Industrial and Commercial Bank of China. Those operations also are considering CLO investments.

As for Fosun, one source pointed to the presence of securitization specialist David Yan, a former Credit Suisse CLO researcher who arrived in 2014 after a stint at Ping An Insurance.

There additionally is talk of interest from Chinese insurers, which already are regarded as sophisticated investors in structured products worldwide.

The emergence of those institutions reflects a sentiment that U.S. CLOs offer strong returns with minimal risk, at a time when the Chinese yuan is falling and rising interest rates are dragging down the values of existing fixed-income holdings. “Every investor in China wants to get their money offshore,” another source said, adding that banks’ proprietary trading desks can get around rules controlling foreign deployment of capital.

In fact, even the Chinese government has been encouraging state-owned banks to offset exposures to local borrowers by diversifying their holdings.

Given the vast size of China’s economy, CLO professionals in the States are thrilled with the prospect of dealing with investors there. Consider that Industrial and Commercial Bank of China ranks as the world’s largest bank with $3.1 trillion of assets — and already has a team in New York that is equipped to enter the market.

The interest also helps explain a bullish turn in sentiment among issuers, dealers and investors in recent weeks, with many predicting a long-term move toward tighter spreads. Triple-A-rated notes with 5.5-year lives already are trading at 140 bp over three-month Libor, in about 5 bp from mid-November.

Panelists at Opal Group’s “CLO Summit” on Dec. 6-8 in Dana Point, Calif., predicted spreads could move as tight as 115 bp over Libor next year. That said, Wells Fargo researcher Dave Preston noted in a Dec. 12 report that a move inside of 130 bp could prove difficult because some new foreign buyers wouldn’t find the returns compelling enough to participate.

Industry professionals also said the interest from China helped elevate the mood at Opal’s conference, which last year was dampened by unsteady market conditions. “Last year was a real bummer, but this year managers are printing deals and there was a lot of buzz about the Chinese buyers. People are pretty bullish on next year,” one issuer said.

Banks in the U.S. and Japan currently are the largest buyers of senior CLO securities.