Significant Announcements For Generator Bonds
Ratings Upgrade and Buy-Back Announcements for Generator Bonds Limited
14th November 2007 - Generator Bonds Limited has made two significant announcements
on the NZX during the past month following the ratings upgrade of its Generator Bonds (NZX Code: GTR010) from A- to AA- and the introduction of a buyback facility for its Commodity Bonds (NZX Code: MCB010) issue.
The announcements were made despite the recent correction in global and local fixed interest markets when a number of fund managers and local finance debenture issuers were experiencing significant difficulties. Generator Bonds and Commodity Bonds are both NZX listed high yield structured investments.
Macquarie Global Investments’ Head of Product Development, Craig Swanger, said the Generator Bonds ratings upgrade was particularly pleasing.
“Standard & Poors (S&P) have upgraded Generator Bonds Limited from A- to AA- which is one of the higher ratings available,” Mr Swanger said. (1)
We issued Generator Bonds in 2003, with a credit rating from S&P of A-, but S&P continuously review these ratings, and will upgrade or downgrade if there is a change in their risk assessment.
“Generator Bonds has been A- rated every day since its issue. Now with less than one year to run in its five year term, S&P have upgraded the issue to AA-, amidst some of the most significant volatility in credit markets this decade.”
Mr Swanger also said Commodity Bonds was only one year into its five year term.
“The security of Commodity Bonds is linked to a range of commodity prices, with higher prices supporting higher bond security. Commodity Bonds investors’ capital will be repaid in full at maturity even if prices of relevant commodities fall by 50 per cent over the five year term.
However, during the past 14 months the prices of the commodities chosen for the Commodity Bonds issue have risen since the 23/08/06 base date to 31/10/2007 by an average of 29 per cent. (2)
(Commodity Bonds are structured investments and include certain risks to the repayment of investors’ principal that are not prevalent in other traditional fixed income investments. Commodity prices can be volatile. In certain circumstances, falls in the prices of commodities to which the Commodity Bonds are exposed during the period at the end of the five–year term (Averaging Period) may result in a reduction or complete loss of investors’ principal amount.)
Despite this strong fundamental performance, Commodity Bonds’ NZX listed price has been affected by broader market concerns about fixed interest markets in general and in particular, structured finance deals like Collateralised Debt Obligations.
Mr Swanger said the security of many structured products had been questioned during the recent market correction, with some adversely affected by negative market sentiment generated by unrelated factors such as the performance of some high profile managed funds. For example the Commodity Bonds’ NZX price had fallen as low as $89.00 from its $100.00 issue price.
Because of this, Generator Bonds Limited and Macquarie Investment Management (NZ) Limited have gained the necessary approvals to offer an off market buyback facility. By simply calling Computershare and applying to participate in the facility before each cut-off date (first cut-off date: 13 November 2007), investors can exit Commodity Bonds at a Net Average Value based price.
The full terms and conditions for the buy back facility can be found on NZX announcements dated 1-Nov-07 and 6-Nov-07 available through the NZX website at www.nzx.co.nz (Stock code: MCB010).
The indicative buyback value for the upcoming buyback was $98.57 as announced to the NZX on 6 November 2007, a substantial premium to the NZX trading price at the time. This premium is despite the fact that Commodity Bonds, while structured and non traditional, are fixed interest securities.
In particular, while the repayment of investor’s principal at maturity is subject to different risks than other traditional fixed interest securities, Commodity Bonds offer fixed coupons or interest payments for their full term. They are therefore like a fixed rate corporate bond or term deposit in this regard. If interest rates rise, these securities do not pay more. Similarly, if they fall, they don’t pay less. This means that interest rate rises have a negative impact on the value of this type of securities.
Mr Swanger said interest rates in NZ have risen in the past year, far more than expected by market experts a year ago. This rises alone should have eroded more than three per cent off the value of Commodity Bonds, and other securities with a similar maturity that pay fixed coupons or interest.
However, the premium to the NZX traded price stands, for two key reasons:
First: Commodity Bonds is not linked in any way to the troubled US mortgage market.
Secondly: the commodity prices that drive Commodity Bonds’ security have risen, largely due to demand for commodities from China and India. This price rise has allowed Commodity Bonds’ value to rise sufficiently to cover the loss of value from NZ interest rate rises in part, and to recoup all the issue costs.
As a result, the buyback facility is being offered with an indicative price of $98.57, a significant premium over the NZX price prior to the announcement of the facility.
The Head of Macquarie Equities and a director of Generator Bonds Limited, John Rowley, said the Generator Bonds upgrade, at a time of unprecedented credit market tension both globally and locally, and the Commodity Bonds’ buyback facility price, despite the NZ interest rate rises, show the benefits of appropriately structured investment products.
“We are strong supporters of structured products being a useful tool as a part of an intelligently constructed investment portfolio.
“New Zealand’s economy does not offer as much diversification as other economies. This means NZ investors have two choices: accept the risks of not diversifying fully and ride out the shocks to the NZ economy like the recent finance debenture crisis; or they can go offshore.
“Structured products offer a simple way to access offshore markets, often with additional risk management features like a credit rating. Further the latest PIE and FDR changes means that there are new opportunities for investors to further enhance their post-tax risk return profile through the appropriate structures.
“They can be complex, but then so are managed funds or debentures. Investing in today’s markets is not easy. That’s where financial advisers, well trained in the risks of these markets, can add so much value. The NZ financial advisers we work with get this support, and as a result they have the understanding required to advise their clients appropriately.
“The key is access to global market expertise, access to expertise in legal and tax structuring that can easily understand structured products and managed funds, and the training to understand how to put a portfolio together that minimises risks for an investors’ required income.
“Our Macquarie Equities advisers have this backing from Macquarie’s global markets networks and research teams. And they have the sophistication and local market understanding to help New Zealand investors construct a conservative and well diversified portfolio, taking the best on offer from structured products, managed funds and NZ securities.”