Japanese investors are ploughing back into the same types of risky US corporate loan investments that caused them losses during the 2008 credit crisis. They are pouring cash into loans to finance Burger King operator Restaurant Brands International, hotel manager Hilton Worldwide Finance and Caesars Entertainment Resort Properties. They are snapping up pools of the debt that have been sliced into pieces of varying risk and return, and converted into yen-denominated securities. The logic is simple: these buyers are desperate for a way to juice returns with sovereign bonds yielding almost nothing, and speculative-grade loans offer more than five extra percentage points of compensation. Some analysts and investors say the desire for yield is blinding Japanese investors to the risks as US regulators warn that underwriting standards have slipped too far. "In the US, people have become a little sceptical" of the asset class, said Yusuke Ueda, a credit analyst at Bank of America Merrill Lynch. Japanese investors "are just buying anyway", he said. Buyers include regional banks, credit unions and asset-management arms of the country's two largest banking groups, Mitsubishi UFJ Financial Group and Sumitomo Mitsui Financial Group. Funds of both companies ranked a junk-rated US$4.3 billion loan to PetSmart, the pet-supply firm, among their top 10 holdings as of March. Default rates in the US are historically low now, and Moody's Investors Service predicts they will remain subdued this year, at about 2.7 per cent by December. The ratings company does see the potential for problems further out. "We're concerned that banks that originated highly leveraged transactions over the past several years may be unwilling to refinance those transactions in the future," wrote Min Xu, a Moody's analyst. "These issuers are likely to become vulnerable to default risk." Part of the allure of leveraged loans is that they offer floating-rate interest payments, which is appealing as the Federal Reserve prepares to raise borrowing costs. They also rank ahead of bonds issued by the same companies in a bankruptcy. It is even harder for Japanese investors to refuse the debt when it is packaged with a currency hedge, and others are willing to manage the loans for them. Guggenheim Partners is among asset managers of the underlying loans that converted debt issued by collateralised loan obligations - which repackage a pool of leveraged loans - into AAA-rated yen bonds in deals arranged by Mitsubishi UFJ. The first such deal rated by Moody's was created in March last year, and at least eight more have been issued since, according to the credit rater. Japanese investors are being lured into the loan market at the same time regulators, including the Federal Reserve, warn investor protections have weakened too much. The push from bank supervisors is an effort to prevent a repeat of what happened when credit markets seized up seven years ago. Mizuho Financial Group ramped up its structured-finance business for packaging US subprime debt at the end of 2006 just before the market crashed, while Norinchukin Bank sank trillions of yen into collateralised loan obligations, mortgages and asset-backed securities overseas that resulted in losses. The two alone had 1.16 trillion yen (HK$75.6 billion) in combined deficits in the year ended March 2009. Money has been pouring into overseas assets as the Bank of Japan pushes ahead with its unprecedented bond buying programme to ignite growth. Japan overtook China as the top foreign holder of US government debt in February for the first time since the global financial crisis. The bank kept a plan to expand the monetary base at an 80 trillion yen annual pace on Thursday, even as it cuts its growth and price estimates for the year to March and said it now saw price gains reaching its goal in the first half of the following fiscal year. Concern is also growing that underwriting standards have deteriorated too much as the global hunt for yield intensifies. The lax lending practices prevalent in the run-up to the crisis have made a comeback, according to David Hunt, the chief executive of Prudential Investment Management. "I'd say in the last 18 months we've started to see some of that return, for the very first time," he said. "We all as an industry need to be careful we don't fall back into some of the ways that got us into trouble in the first place."