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NEW YORK, May 19 (Reuters) - The US Collateralized Loan Obligation (CLO) market is targeting Chinese banks and insurance companies in the hope that a more diversified investor base will help to offset the effects of falling returns and the introduction of new rules that require managers to hold some of their fund’s risk.
Capital controls have curbed Chinese investment to date, but US CLO managers are currently laying the groundwork for future participation with visits to the country and presentations.
This new and potentially very large source of capital could have a significant effect on the US$450bn US CLO market. Higher demand would help lower the spreads paid to CLO senior debt holders and increase payments to the fund’s most junior investors who receive the interest left over after everyone else is paid.
“If Chinese buyers came with even a small percentage of their capital, it could have a meaningful impact on the CLO market,” said Dan Spinner, a principal at Eagle Point Credit Management, who was a keynote speaker at the annual conference of the Chinese Securitization Forum in Beijing last month.
Although Japanese and South Korean investors have been investing in US CLOs for some time, the introduction of Chinese buyers opens up a new pool of capital that is willing to buy across the capital structure, from highly-rated Triple A paper to equity tranches.
Chinese firms including Fosun, Industrial and Commercial Bank of China and China Investment Corp have invested or discussed investing in US CLOs in the last year, sources said.
CLOs are already a favored product in China; the internal Chinese CLO market, which securitizes loans from banks’ balance sheets, is one of the biggest structured finance asset classes in the country, according to Rich Mertl, an associate at law firm Dechert LLP.
The funds made up almost RMB150bn (US$21.8bn) of the RMB858bn internal Chinese securitization market in 2016, according to Standard & Poor’s.
Managers are hoping that familiarity with balance sheet CLOs will extend to US arbitrage CLOs as Chinese investors seek higher-yielding, dollar-denominated assets following the depreciation of the renminbi.
Significant Chinese investment into US CLOs was stalled by capital restrictions that went into effect late last year. China’s foreign exchange regulator said capital outflows dropped in the first quarter, Reuters reported in April.
“If not for changes in regulation near the end of 2016, which impacted overseas investment, China might become the most important Triple A funding for US CLOs during 2017,” said Yang Pang, the deputy secretary general of the China Securitization Forum.
Representatives for the Chinese investors could not be reached or did not return e-mails seeking comment.
US CLOs were a highlight of this year’s annual China Securitization Forum conference in April. The Structured Finance Industry Group (SFIG) first sent a delegation in 2015 when the event focused on basic, introductory panels. This year the focus was on Chinese investment in international markets, Richard Johns, SFIG’s executive director, said.
“There is growing interest from Chinese investors and they are coming to better appreciate that US CLO equity and debt performed well historically for long-term investors who held to maturity,” Spinner said.
MUFG Securities held a CLO and credit conference in Shanghai on April 20, its first in the country, according to Asif Khan, who runs the bank’s new-issue CLO business. The event included presentations and panel discussions with US CLO managers CIFC Asset Management, Crescent Capital Group and Marathon Asset Management.
"There are vast pools of capital in China in the form of insurance companies, banks and other institutions, and US CLO market participants are taking the long-term view now to lay the groundwork for future investment," according to Jonathan Insull, a portfolio manager at Crescent.
CIFC thinks China could be such a big growth area for CLOs and credit in general, that last month it hired Yen Li Chew as a managing director to focus on outreach to investors in China as well as Taiwan, according to Oliver Wriedt, the firm’s co-chief executive officer.
Although the market has potential, many are cautioning that it will take time before Chinese investors become a meaningful part of the US CLO market.
“It may be the very early days of the Chinese securitization market, but when you look at the size of the Chinese economy very early in the growth cycle, it becomes very relevant to global capital markets,” Johns said. (Reporting by Kristen Haunss; Editing By Tessa Walsh)