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Japan’s Mitsubishi UFJ Financial Group is in talks with investors to offload its exposure to about $2bn of loans it extended to listed private credit funds, according to people familiar with the matter.
The transaction would protect the largest Japanese bank against losses if private credit funds failed to repay their debt. It also offers the bank capital relief to free up more capacity for lending and dividend payouts.
The talks come as banks tighten the terms of lending to private credit funds, which have endured a surge in redemptions this year as investors worry AI will ravage the software companies they have financed.
MUFG has been pitching institutional investors in recent weeks on a $200mn risk-transfer product, which is underpinned by about $2bn of credit lines for business development companies, vehicles that are widely used by private credit funds, the people said.
The risk transfer would allow MUFG to shift the credit risk of the loan portfolio to third-party investors without selling the actual assets.
The risk transfer included mostly untapped revolving credit facilities for BDCs, with only about $820mn of loans having been drawn, the people noted. Final deal size and structure were still subject to negotiation, they added.
“Bankers are under pressure to tell their bosses that they got their private credit exposure down because investors will ask in upcoming earnings calls,” one of the people said.
Brendon Browne, a managing director at S&P Global, added that banks used risk transfers to reduce their exposure to any single type of borrower.
“Banks don’t want to see any individual type of loan grow too much in the overall portfolio,” Browne said.
MUFG, which is scheduled to report full-year earnings on Friday, declined to comment.
Japanese banks, which boast large balance sheets driven by massive household deposits domestically, are active backers of Wall Street private credit funds. These funds make loans to small and medium-sized companies, often backed by private equity and with large debtloads.
The largest of the so-called megabanks in Japan, MUFG owns more than 20 per cent of Morgan Stanley after rescuing the US firm with a $9bn investment during the financial crisis. Since then it has built and deepened joint ventures and partnerships across investment banking, equities, wealth and global asset management.
Last year the groups announced the launch of MUFG Morgan Stanley Credit Solutions, noting that “Japan’s private credit market is considered to have high potential”. MUFG’s megabank rivals had made their own moves into the US, including Sumitomo Mitsui Financial Group taking a minority stake in Jefferies and considering a potential takeover.
Last year, Sumitomo Mitsui Banking Corporation, a member of SMFG, sold a first-of-its-kind risk transfer package that was linked to at least $3bn of credit lines for BDCs, setting a market precedent for using these strategies to manage private credit risks.
Still, such risks could remain within the banking system if banks are also providing financing to investors in risk transfers, although the hidden leverage is believed to be small, Browne said.
“We’re closely watching for any systemic risks if this market continues to grow,” he said.
