Eleven years ago, AXA Investment Managers (IM) was one of the first firms to launch a European CLO, and through the most recent financial crisis, when so many new entrants to the European CLO space found it impossible to stay in business, its products were among the few survivors.
Now, the investment manager has taken a new route, that of the global, open-ended funds—a product that Jean-Philippe Levilain, AXA IM’s Paris-based head of leveraged finance (which consists of a platform of 17 professionals dedicated to leveraged loans), believes will eventually come to replace CLOs as Europe’s dominant institutional investor.
“While we still like CLOs and we are still working on them, we believe their future in Europe is more at risk, mainly because of changes in regulation,” Levilain said. “We believe, given the proven liquidity of the asset class even during the crisis, that open-ended funds will have a lot of potential in Europe because bank lending is going to decrease more going forward, and investors like insurance companies, pension funds family offices and so on have little exposure to leveraged finance and would like to have more.”
Liquidity also allows for active portfolio management and greater risk control.
These kinds of investors, Levilain said, are looking for products that offer a tactical allocation to leveraged finance. They want products that are safe and provide the right risk/reward mix and benefit from a high diversification effect.
Furthermore, a greater number of investors in Europe want to have a global allocation to leveraged finance – they want to be able to put their money into a single product that offers access to both European and US high yield bonds and loans, he said.
The AXA IM European Loan Fund —which was launched a year ago—offers just that option and allows a greater number of investors to access the leveraged finance markets.
“We believe that open-ended funds of this nature, which have higher levels of liquidity and that offer access to both Europe and the U.S., will replace CLOs in Europe,” Levilain said. “This kind of product is also the right alternative to equity in the risk space.”
Through the fund, AXA IM is looking to deliver long-term performance returns of between 5% and 6%. The fund’s core focus is leveraged loans but it can also invest up to 20% of its holdings in high yield bonds and in unsecured investment grade bonds, so it has a wide mandate, Levilain said.
“We think there’s value in both loans and bonds and for us, the idea is that the market is a continuum from bond to loan, and from sub-investment grade to crossover, so we look at everything,” he said.
But what the company places a great deal of emphasis on, though, is taking its time to make a decision on where to invest. Indeed, AXA IM has always maintained a conservative stance, preferring to invest in the most liquid and high quality part of the leveraged universe, in particular the senior secured assets.
Even in the CLO business, AXA IM was more focused on being the best performing CLO manager rather the one that put together the greatest number of vehicles, Levilain said, and it always structured low-levered, plain vanilla transactions.
AXA IM also prefers to invest in short-duration loans with maturities of two to three years, Levilain said, and in defensive industries rather than cyclical ones.
Because of its conservative approach, the recent setback in the European leveraged finance market that is a consequence of the new round of sovereign crisis, came as no surprise to AXA IM.
“We have never been big bulls anyway, so this came as no surprise to us, but it’s important to note that the market only fell by two or three points, so this validates the point that it is less volatile than other markets,” Levilain said. “Also, in the European leveraged space, there is no direct exposure to the peripherals—there is no exposure in Portugal or Greece, and although there are some names from Ireland and Spain, the bulk of exposure is in Western Europe.”
At the beginning of this year, a new rule in the Capital Requirements Directive confused the European CLO market, which had already been through a tough time since the 2008 crisis. More regulation is on the cards, and while CLOs are not going to become extinct in Europe, many European market participants have been working this year on alternative investment structures that would work in lieu of CLOs, and also counter the issue of the high cost of funding that CLOs have faced.
Levilain joined AXA IM in 2005, after having spent seven years with BNP Paribas. He started his career in 1998 as a junior credit analyst with the corporate group of the bank in Tokyo. He then joined the leverage finance group in Paris where he spent two years as a credit analyst on media-telco and LBO transactions originated in the U.S. and in Asia.