Liquidating the CFO

Unfortunately not the human variety even though given current circumstances, that may well be where blame lies.

Bloomberg reports that an Allianz sponsored $387m CFO – a structured bond – is to liquidate, following a vote by investors (HT Fintag).

A CFO is, believe it or not, a collateralised fund obligation: a variant of the CDO, but one backed by bonds referencing the performance of hedge funds via funds of funds. CFOs had been a good way for funds of funds to raise cash.

A little bit of a leverage fest then. The collateralised hubris obligation, perhaps. Says Bloomberg:

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.

In the case of the Allianz CFO then, trouble at the Phoenix fund of fund underlying it caused investors to vote for a liquidation.

But the problem for the remaining $5bn of CFOs is one familiar to a whole range of structured debt products, and particularly CLOs (collateralised loan obligations): market value triggers.

Most CFOs contain unwind triggers or restrictive covenants which are tripped by a deterioration in value of the assets they hold as collateral. And with so many hedge funds now hitting the wall, and consequent hits at funds of funds, the value of any hedge-fund linked bonds CFOs may have bought is bound to be falling.

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