C&B Notes

Financial Asset “Innovation”

To give yield-starved Japanese investors new alternatives, Mitsubishi UFJ is repackaging a CLO consisting of U.S. junk bonds into a yen-denominated instrument.  Among all the primary parties — the investors, the arranger/seller, and the U.S. companies who issued the underlying junk bonds — the arranger may well be the only one who comes out ahead.  Caveat emptor!

To make it easier for Japanese investors to get to this U.S. debt, bankers have repackaged a dollar-denominated collateralized loan obligation into yen-denominated bonds, using derivatives to hedge out risk related to currency fluctuations.  The Repackaged CLO Series GG-A1 Ltd., for example, “consists of a special-purpose entity that will issue Japanese yen-denominated notes and is backed by the U.S. dollar-denominated notes” issued by Kitty Hawk CLO 2015-1 LLC, according to a Standard & Poor’s March 24 pre-sale report.  Essentially, it transforms $249 million worth of a $331 million U.S. CLO managed by Guggenheim Partners Investment Management into highly-rated Japanese-yen denominated bonds, according to an April 15 Moody’s Investors Service report.

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Here’s why this is happening now: Yields in Japan are ultra low — 0.3 percent on 10-year notes — as the Bank of Japan employs record stimulus in its effort to end decades of economic stagnation, including increased bond purchases.  As the BOJ buys, pensions are selling.  Japan’s $1.2 trillion Government Pension Investment Fund, the world’s largest, said on April 2 it hired managers to help shift money from domestic debt into stocks and foreign investments.  Yes, Treasuries remain an easy target for Japanese buyers — the country just overtook China as the top foreign holder of U.S. government debt, a title it hadn’t held since the financial crisis — but many of the other typical global alternatives generally aren’t that appealing right now.  The universe of negative-yielding assets in Europe has expanded as the region’s central bank pledges to maintain its stimulus until it sees sufficient economic growth.