Korean CLO Demand Jumps Even as Japan Warns About Them
Korean CLO Demand Jumps Even as Neighbor Japan Warns About Them
(Bloomberg) -- South Korea’s CLO fever is rising, even as regulators in neighboring Japan warn about the products’ risks.
Holdings of collateralized loan obligations by Korean asset managers and brokerages have more than doubled in less than a year, as investors go on a global hunt for yield, data show. In Japan, where major banks’ CLO holdings jumped 80% in the year ended March, the central bank said the products’ prices could plunge if the global economy weakens.
Korean investors are joining the global flood into CLOs to earn extra returns as interest rates have fallen to a record low at home and around $13 trillion of debt globally has negative yields. While the Bank of Korea has said local investments in those packages of high-risk loans are unlikely to spark market anxiety because the amounts aren’t high, a recent suspension of fund redemptions at a hedge fund that bought CLOs shows the country isn’t immune from trouble.
Lime Asset Management Co., Korea’s biggest hedge fund firm, said last month it had frozen $710 million in withdrawals from its funds, some of which invested in CLOs repackaging trade finance assets.
“Of course investment sizes aren’t that big considering the total assets managed by Korean banks and asset management firms,” said Oh Tae-Rog, a research fellow at Korea Institute of Finance. “Still, we may need to watch whether some of the funds holding risky CLOs are sold to retail investors,” after banks’ sales of high-risk derivative-linked products to individuals sparked controversy, he said.
CLO holdings of Korean asset managers rose to about 4 trillion won ($3.4 billion) at the end of August from about $1.4 billion in end-January, according to Financial Supervisory Service and BOK data. Brokerages’ holdings jumped to 174 billion won at the end of June from 66 billion won from end-2018, while insurers’ increased 13% to 3.27 trillion won in the same period, FSS data show.
The institutions’ combined holdings of junk-rated and the riskiest equity CLO tranches made up 5.9% of their recent total, while the rest was in investment-grade tranches, the data show.
Global money managers avoided lower-rated junk leveraged loans last month amid concern about their performance in a downturn, and some market participants in Korea are also growing worried about the outlook for CLOs.
To contact the reporters on this story: Kyungji Cho in Seoul at kcho54@bloomberg.net;Heejin Kim in Seoul at hkim579@bloomberg.net
To contact the editors responsible for this story: Andrew Monahan at amonahan@bloomberg.net, Ken McCallum
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