Axiom Financial Credit

Promotional communication. Before making any investment decision, please consult the key information document (KID) and the prospectus of the relevant fund, in particular in order to familiarize yourself with its characteristics, risks, and costs.

A subordinated bank bond fund is a bond fund that invests primarily in debt securities issued by banks and financial institutions, whose repayment ranks lower in priority than certain so-called “senior” debt.

These funds may provide access to a portfolio made up of several subordinated bank bonds and several issuers, depending on the fund’s investment policy.

The degree of diversification may vary from one fund to another. In particular, the securities held may differ in terms of maturity, level of subordination, credit quality, coupon, or sensitivity to interest rates.

Subordination means that, in the event of the failure or resolution of the issuing bank, these securities rank below certain more senior claims. They may therefore absorb losses before certain categories of senior debt, depending on their ranking and characteristics. Depending on the type of security, the terms of repayment, conversion, or write-down may vary.

The diversification provided by the fund does not eliminate the risks associated with bond markets, the banking sector, or the issuers held. The fund’s net asset value may rise as well as fall, and capital is not guaranteed.

Subordinated bank bonds are securities issued by banks to contribute to their financing.

Certain instruments, when they meet the applicable regulatory criteria, may also be included in the institution’s various categories of regulatory capital.

Their main characteristic is their repayment ranking: in the event of issuer default, they are generally lower in priority than senior bonds, while remaining distinct from shares.

In a subordinated bank debt fund, the management company selects securities according to its investment policy, market conditions, and its analysis of issuers. It may take into account the financial strength of the banks, maturities, coupons, credit ratings where they exist, as well as the level of subordination of the securities.

Subordinated bank securities may notably differ in terms of:

• Their ranking in the repayment hierarchy;
• Their maturity, where applicable, as well as any early redemption options, the exercise of which is not guaranteed;
• Their fixed, floating, or resettable coupon;
• Their credit quality and sensitivity to the bank’s financial condition;
• Their specific terms in the event of a deterioration in the issuer’s solvency.

Some funds may be exposed to different categories of subordinated debt and bank capital instruments, such as Tier 2 bonds or, where their strategy permits, AT1 securities.

AT1 securities have specific characteristics and a high level of risk: in certain situations provided for in their documentation, their principal may be written down or the instruments may be converted into shares upon certain trigger events. Distributions may also be cancelled and do not constitute a guaranteed payment.

A subordinated bank bond fund involves several risks, linked both to the bond market, the condition of the issuing banks, and the repayment ranking of the securities. The fund’s net asset value is not guaranteed, and the investor may incur a capital loss.

The main risks include:

• Interest rate risk: a rise in interest rates may lead to a decline in the value of the fixed-rate bonds held by the fund, particularly when their duration is high;
• Credit or default risk: a deterioration in a bank’s solvency, or its default, may affect the price of its bonds and result in losses;
• Subordination risk: in the event of the issuer’s resolution or default, subordinated securities may absorb losses before certain categories of senior debt, in accordance with their ranking in the creditor hierarchy and the applicable mechanisms;
• Risk related to hybrid securities: certain securities, in particular AT1s when they are present in the portfolio, may be subject to a write-down of their principal or conversion into shares, and their distributions may be cancelled, in accordance with their terms of issue and the applicable regulations;
• Liquidity risk: certain securities may be more difficult to buy or sell quickly, particularly during periods of stress in the financial markets;
• Sector concentration risk: a specialized fund remains particularly exposed to developments in the banking and financial sector;
• Market risk: perceptions of banking risk, changes in credit spreads, the economic environment, and market conditions may influence the value of the securities.
• Early redemption risk: where a security provides for an early redemption option for the benefit of the issuer, its exercise is not guaranteed. The security may therefore remain outstanding beyond the first contemplated early redemption date.

Past performance is not indicative of future performance. Before making any decision, it is important to consult the key information document, the prospectus, and the fund’s other regulatory documents.

As with other bond funds, changes in interest rates may influence the value of a subordinated bank bond fund. All else being equal, a rise in rates tends to lower the price of existing fixed-rate bonds, while a fall in rates may support their value.

The extent of this effect depends in particular on the portfolio’s sensitivity or duration. In general, the higher the duration, the more sensitive the fund may be to interest rate movements. However, the performance of a fund invested in subordinated bank debt does not depend solely on policy rates or bond yields.

It may also be influenced by:

• Changes in the perceived credit quality of the issuing banks;
• Yield differentials, also known as credit spreads;
• Volatility in the financial markets;
• Regulatory developments applicable to the banking sector;
• The composition of the portfolio, in particular the share of floating-rate, fixed-rate, or hybrid securities.

A fall in rates therefore does not guarantee an increase in net asset value, just as a rise in rates does not systematically result in the same decline for all funds. The impact depends on the management strategy and the securities actually held.

Before investing in a subordinated bank bond fund, it is appropriate to assess whether its characteristics, level of risk, and investment horizon are suited to one’s financial situation, objectives, and ability to bear potential losses.

Several factors may be reviewed:

• The fund’s investment strategy and management objective;
• The share of the portfolio actually invested in subordinated bank bonds;
• The nature of the securities held, for example Tier 2 debt, AT1 securities, or other subordinated financial bonds;
• The level of subordination and the specific mechanisms attached to certain securities;
• The credit quality of the issuers and diversification across banks, countries, and geographic areas;
• The portfolio’s duration or sensitivity to interest rate movements;
• Any exposure to more complex or less liquid securities;
• Subscription, management, transaction and, where applicable, performance fees;
• The recommended investment horizon;
• The terms of early redemption of the securities and the risk that redemption options may not be exercised;
• The risk indicator, performance scenarios, and the information contained in the KID;
• The prospectus, the fund rules or articles of association, as well as the latest available periodic reports.

The KID and the prospectus notably make it easier to understand the risks, fees, investment policy, and operating terms of the fund. In case of doubt as to whether the product is suitable for one’s personal situation, it may be useful to seek advice from an authorized professional.