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Fidelity to suspend coupon payments on NZDX-listed bonds

Fidelity to suspend coupon payments on NZDX-listed bonds again

Aug. 10 (BusinessDesk) - Fidelity Life Assurance Co. has suspended interest payments on its NZDX-listed bonds and halted trading activity of the fund they finance after its value was eroded by volatility in the U.S. Treasury bonds it writes options on.

The fund reported further trading losses after yesterday’s “unexpected rally” in the U.S. bond market and “the value of the fund has now fallen below the bond floor,” Fidelity said in a statement to the exchange.

“All funds will now be transferred to the fixed portfolio assets and trading of new options has ceased,” it said. “No further coupons will be paid.”

The unrated 9.25% bonds, maturing in July 2013, last traded at a price of 85.06 cents in the dollar, according to NZX data. There are $75 million of the bonds on issue, which are capital protected by Westpac Banking Corp.

The fund writes options on U.S. 10-year Treasuries, which have soared as investors sought a relatively safe haven of in the wake of the U.S. credit rating downgrade, pushing the yield to 2.27%, the lowest since January 2009, and down 146 basis points from the recent high of 3.73% on Feb. 8.

The fund effectively synthesizes a fixed interest investment. Fidelity would have set aside a portion of the funds to ensure Westpac guaranteed the capital on maturity date on maturity date and would use the balance on its options strategy – selling puts and calls on U.S. Treasuries for a premium. The market value of the fund had shrunk to $71.5 million as at Aug. 8, from $89 million on June 30.

The fund previously suspended interest payments in the wake of the collapse of Lehman Brothers in September 2008, when it missed two payments. They were first issued in April 2007.

Fidelity Life last year fended off a hostile takeover approach from Tower Ltd., the insurer controlled by Guinness Peat Group.


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