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Resilience and regulatory changes driving returns

Axiom European Financial Debt Fund 17 November 2021 Review
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Axiom European Financial Debt Fund

Resilience and regulatory changes driving returns

Investment update

Investment companies

17 November 2021

Price

94.4p

Market cap

£86.8m

NAV*

£96.9m

NAV per share*

105.7p

*As at end of September 2021

Discount to NAV

10.6%

Annualised current yield

6.4%

Ordinary shares in issue

91.9m

Free float

85.1%

Code

AXI

Primary exchange

LSE Specialist Fund Segment

AIC sector

Sector Specialist: Debt

Gearing

Net cash as % NAV 30 September 2021

3%

Fund objective

Axiom European Financial Debt Fund is a Guernsey-domiciled, London-listed, closed-end fund investing in regulatory capital securities in Europe. It seeks opportunities presented by Basel III and Solvency II transitions. It has a diversified approach across a broad range of subordinated debt issued by financial services companies. It uses five sub-strategies to obtain attractive current income and capital gains. AXI has a target return of 10% pa over seven years.

Bull points

Investment niche requiring expertise allows for relatively good returns.

Bank regulatory capital instruments carry premium yields and should remain resilient as government and central banks support is tapered.

Further capital optimisation means more investment opportunities for Axiom.

Bear points

Bank equity and debt securities have been out of favour since the financial crisis.

Rising interest rates could affect debt prices.

Macro shocks can affect risk perception.

Analyst

Pedro Fonseca

+44 (0)20 3077 5700

Axiom European Financial Debt Fund is a research client of Edison Investment Research Limited

Axiom European Financial Debt Fund (AXI) has made a 21% total return over the last 12 months, well above the average of its debt investing closed-end funds peers. AXI’s investment space, European financials regulatory capital debt, has remained buoyant. Bank capital equity ratios remain high, NPLs are falling, balance sheet liquidity is comfortable and profitability is growing (eurozone banks’ average ROE was 7.2% in Q121). Rising interest rates (if not excessive) should be good news for banks’ margins and profitability at this stage of the cycle. AXI’s portfolio has a 7.8% running yield; 8.3% to perpetuity. AXI is trading on an 11% discount to NAV with a covered 6.4% dividend yield.

EU banks’ common equity tier 1 ratios (CET1) continue to rise

Source: European Central Bank, European Banking Authority

Why invest in bank regulatory capital now?

Although the bank regulatory debt market has been robust in 2021, it continues to offer yields that are usually above similarly rated debt. We expect these instruments to do well as banks demonstrate good balance sheet resilience in the face of ongoing reductions in government and central bank support. Moreover, there is still much legacy regulatory debt that needs to be called in by the banks and replaced with debt that is regulatory-wise more efficient under new, stricter rules; this is good news for niche investors such as AXI that use their expertise to position themselves.

The analyst’s view

Our view remains that there will be no cliff-edge economic scenario, as central banks and governments will be pragmatic and careful as support measures are tapered off. Potentially higher than expected (and generally elevated) loan impairments are mainly an equity story. Banks now tend to have strong equity bases and de-risked business models due to stricter regulatory requirements. For the sizeable majority of banks, the regulatory capital instruments that AXI invests in will not be called upon to absorb asset losses, allowing AXI to benefit from their premium yields.

Valuation: Dividend 6.4%, NAV discount 11%

AXI is trading at an 11% NAV discount (this has ranged 3–14% in recent quarters), with a trailing dividend yield of 6.4%. The dividend has been stable since 2016.

Why invest in bank regulatory capital?

Banks and insurance companies are allowed to issue debt instruments that have sufficient equity-like features for them to be considered also regulatory capital. They are a form of loss-absorbing capital that only suffers losses or modification once equity is wiped out or drops below certain thresholds. To qualify, instruments typically will be subordinated to secured debt, unsecured, offer variable non-cumulative coupons and be perpetual or very long duration.

Although cheaper for the banks to issue than equity, these instruments typically command relatively higher yields than regular debt. The European regulatory capital debt market is a relatively sizeable one at an estimated €800bn (Bloomberg).

Regulatory rules have been becoming stricter over time and as some instruments have seen their regulatory value banks decline. This can encourage banks to redeem those instruments that offer poor value for their regulatory value. In our initiation note Capital opportunities (13 April 2021) we summarise the changes in regulatory capital, including the regulatory grading of these instruments, in the appendix on page 13.

It is niche segment, where understanding not only banks but the trends in bank regulation can allow for attractive investment opportunities. Bank balance sheets are now usually more robustly capitalised and business models de-risked since the 2008–09 financial crisis (the Global Financial Crisis, GFC).

Axiom (the manager of AXI) has a proprietary model that looks at various bonds to determine where opportunities exist, which ones are most likely to be redeemed and at what prices. Axiom uses five investment strategies, which we detail in the asset allocation section (page 6). These combine to generate good steady income through coupons and upside by AXI investing in special situations as well as restructuring (in terms of business model and operations rather than the debt itself) stories.

Market outlook

European banks’ balance sheets have been strengthening and profitability rising as the European economies continue to recover. As we pointed out in our initiation note, the COVID-19 crisis was a useful test to the banking sector which in general they passed quite well. Eurozone return on equity (ROE) was 7.2% in the first quarter of 2021, the highest since the first half of 2018. The average sector non-performing loan (NPL) ratio is now 2.5%, significantly lower than pre-pandemic levels. The sector common equity Tier 1 (CET1, shown on the front page) ratios are close to historical peak levels at 15.5%.

Exhibit 1: Eurozone banks – NPL as % loans (left hand side) and ROE (%) quarterly progression (right hand)

Source: ECB

Exhibit 1: Eurozone banks – NPL as % loans (left hand side) and ROE (%) quarterly progression (right hand)

Source: ECB

A good deal of this success was due to regulation, changed business models (such as de-emphasising some activities like proprietary trading or investment banking) and greater levels of capital on the balance sheets. It was also due to pragmatic and quick support from central banks and governments. Lessons have been clearly learnt from the GFC.

Support measures are being tapered off (eg the UK furlough system recently ended on 30 September) and this could present some challenges to the banks. However, central banks and governments are expected to remain vigilant and we do not see a cliff-edge scenario where economies plunge into recessions deep and long enough to create significant problems to regulatory capital debt investors.

Bank profitability may be affected by unfavourable macro shocks and challenged by the continued low interest rates (although rates are now expected to start an upward trajectory) or the up-and-coming fintech companies. Loan impairments could increase due to some factors such as the end of loan moratoriums in some countries. However, bank asset losses are unlikely to be of a scale big enough to pierce through the significant equity cushions that banks currently have to the point that regulatory capital debt instruments will be called to absorb some of the losses as well. Therefore, we think that while earnings forecasts may suffer downgrades and dividend payments may be cut, regulatory payments should continue as they did during the pandemic.

Regulatory capital prices

The European regulatory capital market has remained buoyant since our initiation note in April. For example, the ICE BofA bank (investment grade only) contingent capital bonds index yield fell from 3.9% in March 2021 to 3.8% on 13 October. The ICE BofA non-financial high yield index (typically not investment grade) was yielding 3.2% on 27 September (Exhibit 2). Investment-grade bank contingent capital debt continues to offer a decent premium over theoretically riskier non-financials companies. The yield on the ICE BofA euro financial index (regular debt) was only 0.5% on the same date.

If European bank balance sheet capital positions remain resilient (as we believe they will), the relatively high yields of their regulatory capital debt instruments should allow for good returns in coming quarters in many cases.

Exhibit 2: Yields – European bank (investment grade) contingent capital vs non-financial high yield*

Exhibit 3: Yields – European bank (investment grade) contingent cap spread vs non-financial high yield* (%)

Source: Refinitiv. Note: *ICE BofA indices, yield to maturity, euros.

Source: Refinitiv. Note: *ICE BofA indices, yield to maturity, euros.

Exhibit 2: Yields – European bank (investment grade) contingent capital vs non-financial high yield*

Source: Refinitiv. Note: *ICE BofA indices, yield to maturity, euros.

Exhibit 3: Yields – European bank (investment grade) contingent cap spread vs non-financial high yield* (%)

Source: Refinitiv. Note: *ICE BofA indices, yield to maturity, euros.

The fund manager: Axiom Alternative Investments

The manager’s view

AXI continues to be positive on the market and believes there are plenty of opportunities. It sees the central banks continuing their asset buying, albeit with less volume than in the past. It feels the support for the economy will remain and see a shift from supporting consumers to supporting businesses. Indeed, AXI noted in its latest investor note (September) that ‘the EC sent a draft proposal to extend the State aid Temporary Framework to 30 June 2022, emphasizing the need to avoid any cliff-edge effects’.

It also noted that European Commission insisted that the new rules in the upcoming Basel IV will not result in a significant increase in capital requirement for eurozone banks. AXI are expecting that the total impact of new Basel IV rules could possibly result in about an average 150bp hit to banks’ CET1 ratios and that this would be booked over eight years. This looks quite manageable for the banks in AXI opinion (and we would agree).

AXI sees a steeper yield curve due to inflation pressures, but believes, as we do, that higher rates are good for banks in general at this stage of the cycle.

AXI expects the market activity to remain high, especially ahead of the Basel III grandfathering period deadline of December 2021. At this date, some of the older capital adequacy products will cease to have regulatory value.

Axiom Alternative Investments continued to see bank and insurance company balance sheets as being well capitalised and regulatory capital bonds valuations as relatively attractive, providing premium levels of income with relatively low risks of the being required to absorb losses in financial service companies’ balance sheets. Axiom points out that a BB+ rated bank AT1 bond will yield 3.0–3.5%, while a similarly rated non-financial company will only yield 1.5%, a very significant spread. It expects to see these bonds reprice upwards as we exit the pandemic, support programmes taper off and the impairment story plays out.

Asset allocation

Current portfolio positioning

AXI increased the weight of tier 1 debt instruments in its portfolio from 58% in February 2021 to 64% in September. These bonds are Axiom’s core and largest investment space and include legacy (Basel 1–2) and Basel 3 compliant (AT1) bonds.

AXI also has 18% in tier 2 debt and 13% in straight senior debt. Finally, there is 5% in equity investments. All of the invested companies are financial services companies and banks.

The UK continues to be the largest geography, accounting for 49% of the portfolio in September (42% in February). The remainder is diversified across several European countries as shown in Exhibit 9. Euro exposure is 47% (it was 58% in February), but foreign exchange (FX) exposure is substantially hedged to the pound sterling through FX forward agreements.

The portfolio split between strategies is shown in Exhibit 4. There has been an increase in mid-cap investments from 26% to 36%, while restructuring stories have fallen from 45% to 27%. Relative value strategies account for 30% of the portfolio. The various strategies are described on page 9.

The ratings distribution is shown in Exhibit 6. Due to the loss absorbing and subordinated nature of regulatory capital debt, most of it is not rated as investment grade. This is true if the institution’s senior debt is investment grade. For example, Deutsche Bank is rated A3 (Moody’s) and BBB+ (S&P) for long-term senior debt. However, the AT1 bonds (similar to what AXI holds in its portfolio) are only rated B1 and BB-, respectively. As such, only 7% of AXI’s portfolio is in investment-grade bonds and compares to 17% in February.

Exhibit 4: Portfolio breakdown by strategy (Sep 2021)

Exhibit 5: Portfolio currency breakdown (Sep 2021)

Source: Axiom

Source: Axiom

Exhibit 6: Portfolio ratings breakdown (Sep 2021)

Exhibit 7: Portfolio subordination (Sep 2021)

Source: Axiom

Source: Axiom

Exhibit 8: Portfolio term breakdown (Sep 2021)

Exhibit 9: Portfolio geography breakdown (Sep 2021)

Source: Axiom

Source: Axiom

Exhibit 4: Portfolio breakdown by strategy (Sep 2021)

Source: Axiom

Exhibit 6: Portfolio ratings breakdown (Sep 2021)

Source: Axiom

Exhibit 8: Portfolio term breakdown (Sep 2021)

Source: Axiom

Exhibit 5: Portfolio currency breakdown (Sep 2021)

Source: Axiom

Exhibit 7: Portfolio subordination (Sep 2021)

Source: Axiom

Exhibit 9: Portfolio geography breakdown (Sep 2021)

Source: Axiom

Exhibit 10: Top 10 portfolio holdings (30 Sep 2021)

Security

Strategy

% NAV

Business description

Country

Shawbrook Group PLC 7.875% Perp

Midcap origination

4.1%

Retail and commercial bank

UK

Promontoria MMB SASu 8.000% Perp

Midcap origination

3.9%

Sole shareholder limited company

France

West Bromwich Building Society 3.000% Perp

Restructuring

3.8%

Building society

UK

International Personal Finance 9.750% 11/12/25

Restructuring

3.7%

Home credit and digital bank

UK

Ulster Bank Ireland DAC 11.750% Perp

Restructuring

3.4%

Retail and commercial bank

UK

Deutsche Bank AG 7.125% Perp

Restructuring

3.3%

Investment bank and financial services

Germany

Coperative Bank Finance 9.500% 04/25/29

Restructuring

3.2%

Retail co-operative bank

UK

Cassa di Risparmio di Asti SpA 9.250% Perp

Midcap origination

3.1%

Savings bank

Italy

Piraeus Bank SA 9.750% 06/26/24

Restructuring

3.0%

Retail and commercial bank

Greece

OneSavings Bank PLC 9.125% 05/25/22

Midcap origination

2.9%

Retail and commercial bank

UK

Source: Axiom

Performance

Although AXI is not benchmarked against any index, the managers use the ICE BofA European Financials Index as a reference point. AXI’s shares and net asset value (NAV) have significantly outperformed the over the last five years as shown in the exhibits. The outperformance over the last 12 months is notable; AXI’s NAV is up 19%, the index is down more than 4%, implying a total c 24% outperformance.

Exhibit 12 compares the performance of AXI versus two other bond indices: the ICE BofAML European financials subordinated debt and ICE BofAML general European high yield index. AXI’s NAV has outperformed these two indices as well.

Exhibit 11: Investment company performance to 11 November 2021

Price, NAV and benchmark total return performance, five-year rebased

Price, NAV and benchmark total return performance (%)

Source: Refinitiv, Edison Investment Research. Note: SI=since inception. Inception date is 30 September 2015.

Exhibit 12: Share price and NAV total return performance relative to indices (%)

 

One month

Three months

Six months

One year

Three years

Five years

Price relative to ICE BofAML European Financial

(1.5)

1.3

(0.4)

26.6

16.7

23.9

NAV relative to ICE BofAML European Financial

(0.3)

3.3

6.0

24.0

32.5

36.8

Price relative to ICE BofAML Europ. Subord. Financials

(1.4)

1.5

(0.6)

24.8

10.1

13.1

NAV relative to ICE BofAML Subord. Financials

(0.2)

3.5

5.8

22.3

25.0

24.8

Price relative to ICE BofAML European High Yield

(1.4)

0.9

(1.2)

21.3

7.1

10.6

NAV relative to ICE BofAML European High Yield

(0.2)

2.9

5.2

18.8

21.5

22.0

Source: Refinitiv, Edison Investment Research. Note: Data to end-August 2021. Indices and prices in £. Geometric calculation.

Exhibit 13: NAV total return five-year performance relative to ICE BofAML European Financials

Source: Refinitiv

Peer group comparison

Outperformer at a discount

Exhibit 14 shows a comparison of AXI with a selected peer group of funds from the AIC Sector Specialist: Debt and AIC Sector Specialist: Financials sectors that have significant holdings in high-yield lending or similar investments. We note that there is not a pure European regulatory capital debt peer; AXI is unique. For investors seeking exposure to this asset class, AXI is clearly a more focused play than any of its peers.

The most comparable peers in the table are CQS (47% of fund is financials, but mostly UK), TwentyFour (35% banks), City Merchants (one-third financial) and EJFI (fully financial, but exposure is mostly through collateralised loan obligations). Henderson Diversified is about 20% financials, albeit it has significant US exposure.

We compare the performance over one year. We have also added longer time periods for the peers, to give greater context to the short-term performance data. AXI has performed significantly above average despite the lowest net gearing. Despite this, and having a good dividend, it is trading at the second highest discount to NAV.

Exhibit 14: Selected investment peer group as at 11 November 2021* in sterling terms

% unless stated

Market cap £m

NAV TR
1 year

NAV TR
3 year

NAV TR
5 year

Premium/

(discount)

Ongoing charge

Perf.
fee

Net gearing

Dividend yield

Axiom European Financial Debt Ord

86.8

22.8

29.7

50.1

-10.6

1.4

Yes

97.2

6.4

CQS New City High Yield Ord

252.1

26.3

15.0

35.5

5.5

1.3

Yes

107.5

8.1

CVC Credit Partners Euro Opps EUR

95.2

11.7

5.7

28.0

-7.5

1.5

Yes

101.9

5.2

CVC Credit Partners Euro Opps GBP

163.9

19.7

12.9

34.6

-6.0

1.5

Yes

101.9

4.8

Henderson Diversified Income Ord

156.6

7.6

25.6

32.3

-7.9

0.9

Yes

116.2

5.3

Invesco Bond Income Plus Ord

309.3

12.6

24.0

37.6

-4.8

1.0

Yes

111.2

6.0

TwentyFour Select Monthly Income Ord

185.5

10.7

24.0

48.6

5.4

1.1

Yes

98.9

6.8

EJF Investments Ord

78.6

8.1

10.8

-23.6

2.3

Yes

116.9

8.3

Simple Average

165.8

14.9

18.5

38.1

-6.2

1.4

106.5

6.4

Rank

7

2

1

1

7

4

8

4

Source: Morningstar, Edison Investment Research. Note: *Performance to end-September 2021. TR = total return in sterling terms. Net gearing is total assets less cash and equivalents as a percentage of net assets (100 = ungeared).

Dividends

AXI pays dividends quarterly in April, July, October and January. AXI has maintained its dividend during the pandemic and has been paying 1.50p per quarter since 2017. There have been years that the dividend has been covered (eg 2019) by cash income and years when it has not (eg 2018).

Exhibit 15: Dividends per share history

Source: Axiom

Discount: 11% below NAV

AXI is currently trading at an 11% discount to NAV even though its investment instruments are all accounted on actual market value (level 1) assets and not priced according to a financial model.

Exhibit 16: Five-year discount (%) diluted NAV cum income

Exhibit 17: Buybacks and issuance

Source: Refinitiv

Source: Morningstar

Exhibit 16: Five-year discount (%) diluted NAV cum income

Source: Refinitiv

Exhibit 17: Buybacks and issuance

Source: Morningstar

Fund profile: Bank debt specialist

AXI launched in September 2015 and is a Guernsey domiciled, London-listed, closed-end fund investing in regulatory capital securities in Europe. It seeks opportunities presented by Basel III and Solvency II transitions. It has a diversified approach across a broad range of subordinated debt issued by financial services companies. It uses five sub-strategies to obtain good current income and capital gains. AXI has a target return of 10% pa over seven years.

While the key investments targets are the regulatory capital instruments issued by European financial institutions, the fund will also invest in other debt instruments, such as senior debt, issued by these companies. AXI also invests in derivatives instruments (such as collaterised debt obligations, securities or derivatives) that are linked to regulatory capital instruments or other financial institution investment instruments. AXI invests in both liquid and less liquid instruments. For those less liquid (for example with mid-cap issuers), AXI will sometimes create a market if it can be done profitably.

Investment process

The investment manager is Axiom Alternative Investments (Axiom) and the investment adviser is the Axiom Alternative Investments UK Branch. Although the investment management agreement is with the investment manager, the investment adviser also provides services and support.

The investment team is led by David Benamou (chief investment officer and managing partner of Axiom) and Jérôme Legras (head of research, managing partner), with Gildas Surry (AXI’s portfolio manager, partner) and, more recently, Antonio Roman as portfolio managers. Prior to joining Axiom, David Benamou and Jérôme Legras were managing directors and co-heads of the Capital Structured Finance department at Société Générale Investment Banking. They both designed and implemented many subordinated debt issuances for European banks. Mr Legras also was previously head of quantitative research at Société Générale. Gildas Surry worked at Lazard Freres, Merrill Lynch and Citibank with a focus as an analyst on subordinated debt. Antonio Roman joined Axiom in 2018 having previously worked at JP Morgan AM developing portfolio optimisation tools under insurance regulatory rules and at Goldman Sachs AM as a quantitative analyst focused on client solutions relating to institutional clients with unique economic, regulatory and accounting constraints.

Axiom is focused on the financial services segment and currently manages $2.2bn in assets across nine funds, the first of which was launched in 2009. These funds include one investing only in equity and a long-short debt fund. The team currently has 24 professionals.

AXI follows a three-step process: 1) identifying the target investment instruments; 2) portfolio construction; and 3) portfolio monitoring.

Using in-depth analysis, Axiom looks at structure, regulation and risks when identifying new investments. Structure includes key terms, different types of call and issuer policies. Regulation includes regulatory category of issue, modelling of amortisation profiles and market mispricing. Risks include credit analysis, asset quality review reverse engineering and stress testing analysis.

Portfolio construction is done by the investment manager from the instruments recommended by the investment adviser. Portfolio monitoring looks at both the evolution of regulatory circumstances as the well as the usual company, sector and market trends.

The investment decisions are taken by the investment team and it is not required to, nor does it generally take them to the board, unless there are conflicts of interest or for the application of investment guidelines. David Benamou has veto rights at the investment committee level.

Five investment sub-strategies

AXI uses five investment sub-strategies to obtain the mix of capital gains and current income that it seeks.

These are:

liquid relative value (estimated return 7–8%): this strategy generates some carry income, as well as providing liquidity to deploy for investment opportunities. The heart of this strategy is not only understanding which securities provide good income for risk, but which ones are likely to be redeemed/called in by borrowers because they are expensive for their value as regulatory capital due to changing legislation. Besides regulation all sorts of factors must be considered, such as the complexity of the coupon payments and call options, local legal constraints, staff bonuses, dividends and the bank’s likely available distributable profits. An attractive investment can be made if a security is redeemed sooner than the market expects at a price of par or above. Or a high coupon bond that is being priced as if it is going to be redeemed (ie close to par) can provide an elevated level of income by remaining unredeemed. The complexity of the legacy hybrid debt market in areas such as coupon payments and call options can lead to market mispricing and therefore investment opportunities. Besides price discrepancies, AXI also looks for relative value trades where the spreads are not justified by fundamentals.

less liquid relative value (6–16%): this strategy looks at instruments that are less liquid but generate greater carry income, to help support dividend payments. Investments will be typically bought at a discount and held until maturity.

restructuring stories (7–25%): this strategy is not interested in the debt itself being restructured, but situations where financial companies have faced stressful events that have had an impact on regulatory capital prices (ie the market is pricing that the regulatory capital may have to absorb some losses, eg a skipped coupon payment, a conversion to equity). The aim is to capture remedial and restructuring actions by management and regulators that result in improvements in the financial company’s risk profile and outlook and therefore regulatory capital prices. The changes could involve updated business models, cost cutting, capital structure reorganisation and so on. Here the returns targeted by AXI are greater and are expected to be mostly in the form of capital gains.

special situations (8–35%): this strategy is based on events that trigger an improvement in the regulatory capital pricing and that have not yet been priced correctly by the market. Examples include merger and acquisitions, a bank that has been nationalised but is expected to be re-privatised, situations where there is conversion of some hybrid debt (such as contingent capital) into equity. Capital gains also have a greater emphasis in this strategy.

midcap origination (9–11%): this strategy involves smaller issuers paying a premium for the same levels of risk and allowing greater carry income. AXI will typically look at either high credit quality mid-capitalisation banks or a subsidiary of a larger institution with limited access to capital markets and targeting a relatively small bond issuance (between €20m and €100m). AXI aims not to hold more than 10% of any issue, unless an unusually good risk-reward justifies holding more

There is no minimum portfolio weight for each of these strategies but there are caps. These caps are 20% for restructuring and special situations, 25% for liquid relative value and 30% for less liquid relative value and midcap origination. The current weights are shown in Exhibit 4, page 5, and we note that the restructuring sub-strategy at 35.6% is above the stated cap of 11%.

Axiom’s approach to ESG

AXI integrates environmental, social, and corporate governance (ESG) criteria in its investment in three ways: (1) an in-house database and tools dedicated to ESG, (2) engagement with management and investor relations for information, and (3) information published in annual reports and other regulatory filings (including sustainability reports and task force on climate-related financial disclosures). The ESG policy is detailed on the company’s website. Axiom partners with external consulting firms to assess its portfolio. AXI signed up to the Principles of Responsible Investments (PRI) in 2016. PRI is a UN-supported investor network committed to implement its six investment principles, related to integrating ESG into investment decisions and policies.

Gearing

As set out in its articles of incorporation, AXI is permitted to borrow in any manner. However, the board has limited this to 20% of its direct investments. AXI had £0.2m in bank overdrafts and £6.1m in cash for a net cash position of £5.9m (against a NAV of £94.6m). However, AXI uses derivatives (usually sales and repo contracts) for gearing. The financial statement showed that at the end of H121, AXI had £12.5m of such liabilities with £7.1m in collateral assets used as margin. AXI had a net cash position of 3% of NAV in its latest disclosure.

Fees and charges

AXI has an annual management fee of 1% of NAV that is paid quarterly and in arrears. This fee drops to 0.8% if NAV exceeds £250m on a marginal basis and for the whole amount if NAV exceeds £500m.

There is a 1.5% cap on total expenses. So, if in the final quarter of an accounting period the total expenses (including management fee) exceed 1.5% of NAV, this is offset by the management fee itself being adjusted downwards.

The performance fees (15% of the total shareholder return in excess of 7% pa) are paid annually and are subject to a high-water mark. The performance fee is not subject to the 1.5% total expenses cap. 50% of the performance fee is in cash; the remainder will be in shares.

Capital structure

AXI currently has a single share class, with 91.852m ordinary shares in issue trading on the Specialist Fund Segment of the London Stock Exchange. There are no rules restricting the ability of the directors to issue additional shares on a non-pre-emptive basis at any time. The directors may issue additional shares, pursuant to a placing programme or otherwise, if they determine this to be in the best interests of shareholders and Axiom as a whole. Since the IPO in 2015, there have been 30.9m shares allotted with proceeds of £32m as shown in Exhibit 18.

Exhibit 18: Major shareholders (11 November 2021)

Exhibit 19: Average daily volume (£000s)

Source: Refinitiv

Source: Refinitiv

Exhibit 18: Major shareholders (11 November 2021)

Source: Refinitiv

Exhibit 19: Average daily volume (£000s)

Source: Refinitiv

The board

AXI’s board is comprised of three nonexecutive directors, all of them independent. They are William Scott (chairman). John Renouf (audit committee chair) and Max Hilton. The board is unchanged since our initiation note, which includes summarised biographies.

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Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2021 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

This report has been commissioned by Axiom European Financial Debt Fund and prepared and issued by Edison, in consideration of a fee payable by Axiom European Financial Debt Fund. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2021 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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