Junk Loan Appetite in Japan Spurs Neuberger Berman Hiring Spree

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(Bloomberg) -- Neuberger Berman Group LLC, the money manager once part of Lehman Brothers Holdings Inc., is hiring in Japan as local investors shrug off regulator warnings and buy U.S. leveraged loans.

The Japanese unit boosted staff by 10 to 40 in the past year and is looking to hire more, said Komei Asaba, a managing director in Tokyo at Neuberger Berman East Asia Ltd. Japanese individuals invested about 90 billion yen ($749 million) in the firm’s U.S. loan funds since 2013, he said. The company is aiming for a return of about 6 percent from non-investment grade American lending, versus the 0.36 percent yield on 10-year Japanese government debt.

Pacific Investment Management Co. and Western Asset Management Co. are also targeting the $14 trillion in Japanese household assets with junk U.S. loans as monetary stimulus cuts bond yields to record lows. Leveraged loans outstanding in the U.S. quadrupled in a decade to about $830 billion last year, topping their peak before the global financial crisis and prompting the Federal Reserve to suggest curbs.

“With returns on yen-based bonds stagnating, foreign-currency offerings with higher yields are increasingly popular,” Asaba said. Expansion at the Neuberger Berman office in front of Tokyo Station has made it so crowded that the company is considering moving, he said in an interview.

High-Yielding Funds

Japanese households are no strangers to investing in high-yielding funds, be it junk-grade U.S. corporate debt or emerging market notes or stock. The largest single one in Japan tied to bonds and offered to individuals is the Fidelity US High Yield Fund, which has 1.17 trillion yen in assets, according to data provider Morningstar Inc.

By contrast, bank loan funds offered locally to individuals are small even after almost tripling to about 342 billion yen at the end of February from the previous year, according to calculations by Morningstar. Japan’s largest lenders and brokerages including Mitsubishi UFJ Financial Group Inc. and Nomura Holdings Inc. now all offer products domestically that invest in U.S. loans, after the first such public fund was set up in 2005.

Retirees are buying debt products that offer monthly payouts, said Hiroki Eguro, an analyst at Morningstar. “Funds that target high yields are more popular with Japanese individuals than regular bond trusts.”

The Bank of Japan on Wednesday reiterated its commitment to expanding the monetary base at an annual pace of 80 trillion yen, as forecast by all 34 economists surveyed by Bloomberg.

Regulator Warning

In November, Wall Street’s biggest lenders were summoned by U.S. banking regulators to New York’s Pierre hotel. The message? Stop arranging risky corporate loans that are inflating another credit bubble, or potentially face fines or suspensions, according to people familiar with the matter.

Neuberger Berman was established in 1939 and had $250 billion in assets under management at the end of last year. The New York-based manager was acquired by Lehman Brothers in 2003, before being taken over by staff in 2009, and returned to full employee ownership in December when the final shares owned by Lehman were acquired.

First-lien leveraged loan issuance in the U.S. dropped 65 percent to $63.6 billion in the first quarter as refinancing deals slumped and lending regulation tightened, Bloomberg-compiled data show.

Japanese Demand

Even as investors in the U.S exited bank loan funds in the second half of last year, Japanese individuals remained net buyers of such products sold domestically, adding a record 23.6 billion yen in December, according to Morningstar data.

Neuberger also offers loan funds and other customized products to institutional investors, according to Asaba, who said lenders and life insurance companies look set to increase their stakes in American lending.

“The fundamentals of the U.S. economy and companies are good so there is demand for bank loans,” said Asaba. “We don’t manage yen bonds, and in a sense because of that we’re experiencing a tailwind.”

To contact the reporters on this story: Finbarr Flynn in Tokyo at fflynn3@bloomberg.net; Tesun Oh in Tokyo at toh15@bloomberg.net

To contact the editors responsible for this story: Katrina Nicholas at knicholas2@bloomberg.net; Sandy Hendry at shendry@bloomberg.net Ken McCallum, Andrew Monahan

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