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Capital Markets

CDOs: Axa turns back the clock

Are structures like Jazz music to the ears of investors worried that the credit cycle will turn?

Lorenzo Isla, Barclays Capital Lorenzo Isla, Barclays Capital: sees substantial demand for managed CDOs

The threat of spread-widening continues to lurk just under the surface of benign credit market conditions. One of the unique selling points of a hybrid CDO, Jazz 3, managed by Axa and arranged by Merrill Lynch (neither of whom where able to comment on the deal) is that it counters that hazard. The deal is positioned to take full advantage of the long-awaited downturn in credit and so should be ideal for investors worried about tight credits and the negative outlook, providing a compelling story for investors that fear history is repeating itself.

Jazz 3 is effectively a positive carry call option on future spread widening and future volatility. It is similar to a credit opportunity fund but the manager is using CDO financing to lock in tight liabilities for seven years.

The deal also marks a return to the old-style CDO technique where the arranger sells the complete capital structure, including all tranches of rated risk right from Triple As down to Double Bs and then equity.

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