(Bloomberg) -- Japan Post Bank Co. said it would be cautious about future investment in bundled corporate loans after raising holdings last quarter, as financial authorities increase scrutiny of the practice.

The postal savings giant boosted its holdings of collateralized loan obligations by 15% from June to 1.52 trillion yen ($14 billion) as of Sept. 30, an earnings presentation showed Thursday.

“We are acting very carefully and analyzing a range of issues as authorities show interest” in Japanese investments in overseas CLOs, Hiroichi Shishimi, a senior executive, said at a briefing.

With about $1.7 trillion of household savings, Japan Post Bank has been buying CLOs and other foreign assets in search of returns that domestic government bonds no longer provide. The Bank of Japan signaled concern last month that CLO prices “could fall substantially” if economic and market conditions worsen, while adding that the risk of defaults in top-rated tranches is “basically small.”

Shishimi said the bank examines factors including the reputation of CLO managers and the quality of individual loans included in the vehicles. It conducts strict stress tests to make sure that the amount of CLOs owned at any given time is manageable and won’t undermine its financial strength, he said.

The structure of CLOs, particularly top-rated slices, has improved sharply since the global financial crisis, according to Shishimi. Japan Post Bank has been purchasing AAA rated segments partly because they provide higher yields than regular corporate bonds, he said.

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Another way Japan Post has accumulated exposure to U.S. leveraged loans is through investment funds that buy the debt. The company plans to pare its allocation to such funds and increase its CLO investments because the latter offer a cushion against losses in a downturn, a person with knowledge of the matter said last month.

Norinchukin Bank, the Japanese agricultural lender that holds more CLOs than any other local bank, pared its holdings last quarter after becoming more selective about purchasing the credit products, people with knowledge of the matter said this week.

(Updates with executive’s comment from the third paragraph)

To contact the reporter on this story: Takashi Nakamichi in Tokyo at tnakamichi1@bloomberg.net

To contact the editors responsible for this story: Marcus Wright at mwright115@bloomberg.net, Russell Ward

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