Axa Investment Managers is considering structuring a collateralized debt obligation that has the ability to be more flexible in the amounts of trades it can make per year--preferably allowing an unlimited number of trades. Currently, CDO collateral managers are limited by ratings agencies, and can only turn over 20% of the total amount of the CDO per year. Laurent Gueunier, head of investment grade CDOs in Paris, says Axa has not yet approached the ratings agencies with the idea.
Gueunier says the proposed CDO will be similar to those in its Jazz series. Jazz I and II permit the collateral manager to use a wide variety of fixed-income instruments and to short securities--making the ability to execute more trades a key to optimizing returns.
Axa has made 800 trades in the Jazz deals, according to Gueunier. "You need to trade to maintain the stability of the portfolio. If you have not been trading over the past one-and-a-half years you have been putting your tranches in jeopardy. Either you trade fully or you have a static deal," he says.
A competing European CDO manager says greater flexibility to make trades above and beyond the current 20% limit imposed by ratings agencies would be well received by other collateral managers, especially others that can short securities. "The ability to go long or short credits increases the amount of the trading bucket a manager needs," he notes. An increased ability to trade a CDO portfolio does not necessarily mean there will be greater risk in a deal. "You need to buy into the manager or not," he says.
Katrien Van Acoleyen, an analyst covering CDOs at Standard & Poor's in London, says that typically the agency is quite strict with the 20% trading bucket limit, but could not comment further without having more details on the deal.