Allianz Hedge Fund CFO Faces Liquidation After Vote

Date: Monday, December 1, 2008
Author: Neil Unmack, Bloomberg

Allianz SE’s 300 million-euro ($387 million) collateralized fund obligation linked to the performance of 80 hedge funds will be liquidated after a vote by investors.

Bondholders decided to close the so-called CFO after Allianz limited withdrawals from the 2.2 billion-euro Phenix Alternative Holdings fund of funds backing the security. More than 75 hedge funds have liquidated, suspended client withdrawals or limited redemptions since the start of the year because of turmoil in financial markets, according to data compiled by Bloomberg.

CFOs are similar to collateralized debt obligations that parcel fixed-income assets such as bonds, loans or asset-backed debt into securities of varying risk and returns. Asset managers including Munich-based Allianz and Man Group Plc, the largest publicly traded hedge-fund manager, created about $5 billion of CFOs to raise long-term capital by selling bonds linked to income from hedge funds.

The Phenix CFO “could not survive a shock of the magnitude that we have experienced in 2008,” said Jean-François Vert, chief executive officer of Allianz Alternative Asset Management in Paris. Investors will be repaid in “two or three months,” although holders of 60 million euros of lower-ranking equity may take losses, he said.

‘Severe Deterioration’

Moody’s Investors Service has cut its assessment of CFOs managed by Coast Asset Management LP, Black River Asset Management LLC, Antarctica Asset Management Ltd. and SF Management Ltd., citing “severe deterioration” in the amount of assets that can be sold to repay debt.

Allianz’s Phenix CFO is the first to be liquidated, according to Henry Charpentier, a managing director at Moody’s in Paris. The company rates $3.8 billion of CFO debt, he said.

“Some funds are getting close to the triggers that may cause partial redemption,” Charpentier said in a phone interview. “Net asset values are going down quite markedly.”

CFOs are so-called market value structures, meaning that their credit ratings depend on the value of the assets they own. If net asset values fall below a certain point, the funds have to raise cash and reduce leverage. Severe asset declines may force them to unwind completely.

The Phenix liquidation was triggered when the fund of funds imposed redemptions in October, according to an Allianz official. The Phenix CFO didn’t breach market value triggers, he said.

To contact the reporter on this story: Neil Unmack in London nunmack@bloomberg.net