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AXA Lines Up Billion Dollar CDO Play

30 Mar 2003

AXA Investment Managers, with EUR270 billion (USD286 billion) in assets under management, has billions of dollars set aside to invest in securitized products and plans to expand into managing bespoke CDO notes as well as move into the U.S. Pierre-Emmanuel Juillard, head of securitization and structured credit in Paris, said it plans to invest EUR2-3 billion in ABS and EUR500 million in CDOs in the next three years. The European asset manager is already one of the largest European investors in securitized products with around EUR3 billion in ABS, with a further EUR750 million in CDO equity and EUR700 million in mezzanine tranches. One CDO banker said now is the best time to snap up securitized products because spreads are wider and many investors, such as the monolines, are pulling back.

In the CDO investment arena, Juillard said as CDOs become harder to shift managers and structurers are reacting more quickly to their requests, for example structures are increasingly trapping excess spread. The firm is investing the majority of its capital in leveraged loan CDOs, but Juillard said it also sees opportunities in CDOs of ABS given the right manager. On the ABS side, Juillard said the firm favors notes referenced to large and diversified pools of consumer assets and mortgages. "We stay away from the esoteric deals," added Juillard.

In addition, AXA has big plans on the issuance side. The money manager is in talks with CDO houses about managing bespoke single tranche CDOs. In these deals the structuring house issues one slice of the CDO's capital structure and delta hedges the remainder of the deal. Juillard said it needs to work with a bank that would allow it to trade the portfolio actively. He added, AXA has executed over 800 trades since it launched its Jazz CDO, the first CDO to allow the manager to short credit, last March.

Any CDOs the firm issues have to meet three criteria, the first is based around market timing, the second is the structure of the deal to make sure it cannot be arbitraged and the third is the investment process. Juillard believes an innovative structure can make a deal. For example in the Jazz transaction using an unfunded structure allows the manager to buy high quality investment grade assets with low yields on a moderate leverage and still return 15% on the equity. If it could not short credits without funding it would not be able to achieve this, he said.

Juillard is predicting synthetic CDOs will take off in the U.S. in the next 12 months and plans to be ready to manage deals. "We are building our network," he added.

30 Mar 2003