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May 05, 2017  

China Institutions Hesitating on US CLOs

Collateralized loan obligation professionals in the U.S. are backing away from predictions for an influx of China-based investors.

The disappointing outlook emerged as industry participants returned from the China Securitization Forum’s annual main-event conference, held April 24-26 at the China National Convention Center in Beijing. They reported that major banks, insurers and asset managers in the country expressed interest in CLOs from the States, while indicating that they would need more time than anticipated to study the market.

Among China-based institutions, only sovereign wealth fund China Investment Corp., investment company Fosun International and Industrial and Commercial Bank of China are known to have taken direct stakes in U.S CLOs — with some others likely placing capital in funds that pursue such deals. But issuers in the States see those shops and their peers as having the potential to become major buyers.

One source who attended the conference described the operations as well funded and sophisticated, with an understanding of the roles managers play. “But they are wary of what might happen to their investment. They ask a lot of questions about the games that can be played,” he added, referring to collateral trades that can mask performance problems.

There also are concerns that asset performance could be due for a downturn. What’s more, China’s State Administration of Foreign Exchange responded to a decline in the country’s foreign-currency reserves in December by reducing allowable deployments of capital to other nations. The belief now is that it could take years before Chinese investors develop the types of routine U.S. CLO-buying programs that already are in place in Japan and Korea. “There is definitely real interest,” one issuer said. “The challenge is that they move so slowly.”

Still, China Securitization Forum executive general secretary Yang Pang insisted that investments will pick up again — with Chinese buyers possibly becoming Asia’s largest consumers of triple-A-rated CLO paper. “I see that coming eventually, and frankly it was building up until the [State Administration of Foreign Exchange’s action],” he said.

Meanwhile, some China-based institutions could invest in U.S. CLOs via Hong Kong units that oversee American-dollar accounts and don’t need permission from the central government to put that money to work.

Separately, Dechert attorney Rich Mertl said he spoke with Chinese regulators who were interested in setting the stage for sales of actively managed CLOs by issuers in the country. All CLOs conducted in China so far have featured static portfolios and were intended to shed the risk associated with their underlying loans, as opposed to capturing arbitrage gains.

That difference could help explain why U.S. CLOs have been getting more attention from investors in China than other types of structured products from the States. While those buyers already can pick up asset-backed bonds at home, typically at generous yields, that option isn’t as available in the CLO market.

Compared to other structured-product issuers, CLO managers in the U.S. also appear to have acted quicker to reach out to Chinese investors. At the same time, the targets of their pitches specifically are interested in gaining exposure to the businesses represented in the deals’ asset pools.

Among U.S. issuers, there was only one presenter at the China Securitization Forum conference: Vincent Ingato of Zais Group. Also in attendance were representatives of fund manager Eagle Point Credit and technology company Virtus.