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Setting Sail

October 15, 2010

Credit Sails was introduced in May, 2006 as a product created by Calyon, and distributed in New Zealand by Forsyth Barr as a way to participate in the CDO (collateralized debt obligation) market that was perceived as hot at the time.  The complexities of the product were potentially masked by the AA credit rating, attractive yield and reputation of those involved in promoting the deal.  Through contacting investors through the shareholder registry, Logic Fund Management discovered a number of investors who held vital information which was not previously in the public domain.  The following is our account, based on comments made by investors to us, of how Credit Sails was sold to investors during that period.

One member of the Credit Sails Community provided this description of the Forsyth Barr Credit Sails broker briefing in 2006:

Credit Sails was first introduced to advisers at a morning meeting by investment banker Shaun Roberts who discussed the product in terms that no one in the room understood.  He had to attend the next day and also attempt to explain the structure.  There was a similar degree of confusion.  The main selling points as I recall were the association with Credit Agricole, the rating of the structure and the capital protection.

The internal selling document or the song sheet for Forsyth Barr advisers, which we believe would have been generated after that specific meeting, was passed onto us as well.  The document states, “We believe that by keeping the selling story to the high level fundamentals, a relatively simple explanation can be communicated to clients.”   This seems to suggest that investors were sold a simplified product that was entirely different to the actual labyrinth of Credit Sails itself.

In our analysis the internal selling document would appear to misrepresent the capital protection component of the product, describing it as a CDO and earning interest, but in fact it was an insurance-type synthetic CDO.  Our assessment is that the risk may have been misunderstood.

During the selling period many e-mails have illuminated the process that investors went through.  One investor in particular asked their adviser, “Are you confident about this product?  It seems a bit technical for us to take in.”

Forsyth Barr Adviser, Liz Douglas replied, “It is hugely technical and I struggle to understand it myself….however the underlying assets are quality and swept regularly for any weakness.”

This response is very similar to the text in the internal selling document confirming our suspicions that advisers used the document to clarify and defend a complex product.


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