Axiom Alternative Investments launches regulatory capital fund

LONDON Axiom Alternative Investments is launching a fund to invest in loss-bearing bonds issued by European banks and insurers, as they look to strengthen balance sheets before the onset of tighter rules on capital reserves.

The fund manager said on Tuesday it was looking to raise at least 100 million pounds $153.46 million) of firepower for the Axiom European Financial Debt Fund (AEFD) by way of a placing of ordinary shares listed on the London Stock Exchange.

Axiom estimates European financial institutions to issue 1 trillion euros ($1.1 trillion) of these types of bonds — which include Contingent Capital securities or CoCos, subordinated debt and junior subordinated debt — to better match their assets against business risks, and to protect themselves from market shocks, as required by Basel III and Solvency II rules.

These securities tend to offer attractive yields compared to traditional equities or bonds because they serve as emergency sources of capital in times of financial distress and the risks that investors lose money on these securities are greater.

Banks can issue CoCos up to the value of 1.5 percent of their risk-weighted assets and HSBC, UniCredit and Banco Santander are among those lenders who have already issued CoCos to bolster capital.

Axiom has run a separate account modelled on AEFD’s proposed strategy since Jan. 1, and delivered gross returns of 12.9 percent as at end-August. AEFD is targeting a net total return in excess of 10 percent annually over a seven-year period, and will target dividends equating to 6 percent of the issue price in the first financial year.

($1 = 0.8961 euros)

($1 = 0.6516 pounds)

(Reporting By Sinead Cruise, editing by David Evans)