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Risky US loans attract Japanese banks

NEW YORK -- Starved by years of scant returns at home, Japanese banks and institutional investors are pushing into the U.S. market for risky loans, piling into an asset class that has seen a flood of new investors.

The Japanese drive into the U.S. leveraged loan market -- loans for highly indebted companies that are parceled out to investors by underwriting banks -- comes as Japanese banks are ready to invest again, after years of trouble in the domestic economy and problems with the banks' credit.

On their home turf, Japanese investors are mired in an environment of negative real returns on their money, as that country struggles to shake years of economic torpor.

"The yield here (in the United States) is better, especially when compared with the domestic Japanese market," said Daniel Chapman, vice president in loan syndication at JPMorgan (NYSE: JPM) in New York. "(Japanese) banks have written off nonperforming assets and are looking to build their balance sheets again."

The loan market, with its relatively high interest rates but high security, has proven a match for investors all over the world looking for yield in a low-return environment. Demand has mounted over the last several years and shows no sign of abating, as investors clamor for floating yields, which readjust periodically to changes in the benchmark interest rate, and relatively high security. Loans sit higher in a company's capital structure than bonds, which means in the case of a restructuring, loan holders will recover more of their investment.

Default rates for leveraged loans remain well under 2 percent, a supportive factor that has rendered many investors more comfortable with riskier credit ratings.

Japanese banks that are active investors in leveraged loans, say U.S. loan syndicate officials, include the Bank of Tokyo-Mitsubishi, which invests through U.S.-based Union Bank of California, Sumitomo Trust & Banking Co. and Mizuho Bank.

Burned by past investments gone sour, the Japanese banks are approaching the leveraged-loan market with discipline, even as they edge into riskier deals and buyout financings. "They're focusing on industries and companies they understand," said JPMorgan's Chapman.

One of those companies was SunGard Data Systems Inc. (NYSE: SDS), which tapped the leveraged-loan market last month for $5 billion in funding for its massive leveraged buyout.

"On SunGard, we saw a great amount of interest coming out of Japan, on both the revolver and on the term loans," said Douglas Antonacci, managing director in loan syndication at JPMorgan. That interest, he added, came from "regular Japanese banks, the same ones that were inactive a few years back."

However, the level of interest from Japanese banks hasn't yet matched the mid-1990s, when they were a constant presence in the market, said Mike Mauer, head of global loans at Citigroup (NYSE: C) in New York. In the 1990s, he said, "it was not uncommon to see commitments to a deal in excess of $100 million. Now it's below $50 million."

Beyond banks, leveraged-loan market officials report, demand for the assets is also growing from Japanese institutional investors. "We're seeing both banks and insurance companies from Japan," said Meredith Coffey, director of analytics at Loan Pricing Corp., which tracks performance and participation in the asset class.

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