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Credit Sails in the Otago Daily Times

December 13, 2010

Probe of broker’s role in failed bonds

By Simon Hartley on Thu, 9 Dec 2010 via Otago Daily Times
"The reality is the product [Credit Sails] did not live up to that rating" - Forsyth Barr managing director Neil Paviour-Smith
“The reality is the product [Credit Sails] did not live up to that rating” – Forsyth Barr managing director Neil Paviour-Smith Southern broking house Forsyth Barr’s lead management role in failed Credit Sails bonds is being investigated by the Commerce Commission.Investors lost $91.5 million when the bond value collapsed.

The 2006 Credit Sails bonds, a complex portfolio of “collateralised debt obligations” based on holding corporate bonds, were lead-managed and underwritten by Forsyth Barr and issued by the Cayman Islands-registered Credit Sails Ltd, having been arranged by the French investment bank Credit Agricole through a subsidiary company, Calyon.

Forsyth Barr defended its role as lead manager, and there had been “no wrongdoing, in any capacity, on our part”, managing director Neil Paviour-Smith said when contacted about the investigation this week.

In 2006 Credit Sails offered investors an 8.5% annual return over six and a-half years, a capital guarantee and an AA rating from ratings agency Standard & Poor’s, in a portfolio comprised mainly of about 120 blue chip companies.

While it appeared a low-risk investment, it was in fact an extremely complicated investment vehicle.

Six companies in the bond portfolio defaulted on loans, including two Icelandic banks, and by late 2008 the bonds of Credit Sails, which traded on the New Zealand debt exchange, were worthless – meaning investors lost not only the interest advertised but their capital.

When contacted this week, a spokeswoman from the Commerce Commission confirmed an investigation was under way, under the Fair Trading Act, “into alleged misleading representations made as to the characteristics and risk of the Credit Sails financial product”.

“As the investigation is under way the commission will make no further comment,” she said.

It was understood funds raised from investors in Credit Sails would then be used as collateral to raise further funds from bank loans.

While only six organisations of the about 120 defaulted, the bonds’ value began to decline and the remaining “good” bonds of the other 114 companies had to be sold to service the debt, the bonds ever-diminishing in value until they were worthless.

Also, most of the defaulting companies were not registered in the original prospectus, meaning investors did not know to whom they were being exposed.

The original Credits Sails issue was set for $75 million, but because of investor demand that was increased to $100 million, with $91.5 million taken in total.

Forsyth Barr was not required to pay any of the $50 million-$60 million it had underwritten, Mr Paviour-Smith said.

“We don’t like what happened and reject any claim of wrongdoing, in any capacity, on our part,” he said.

Credit Sails was “not an in-house” investment only for Forsyth Barr investors.

The prospectus had been reviewed by the Companies Office and New Zealand Stock Exchange and “all the other broking houses” were involved in selling to their respective clients.

Forsyth Barr had “co-ordinated” management of the issue, but it was “not responsible for marketing or what was in the offer documents”, which was made by Calyon.

He said he was “frustrated” that Calyon, the subsidiary of French investment bank Credit Agricole, “had remained silent, for whatever reasons” on the issue, when contacted by the media.

As lead manager Forsyth Barr had “accurately represented to investors” that Standard & Poor’s had rated the collateral of Credit Sails as AA.

“The reality is the product [Credit Sails] did not live up to that rating,” Mr Paviour-Smith said.

Fairfax Media has reported several charities and community groups, including the Hospice Southland Charitable Trust, the New Zealand Methodist Trust Association, the Youth Development Endowment Trust, the Roman Catholic Bishop of the Diocese of Dunedin, the Congregational Christian Church in Samoa and the Dunedin Orphans Club, had Credit Sails investments.

In late October, the trustee of Credit Sails, New Zealand Permanent Trustees, wrote to bond holders, after seeking additional information” on the Credit Sales prospectus, due to the “losses suffered”.

General manager of corporate trustee services Dennis Church concluded there was “insufficient evidence” to determine if issuer Calyon had breached any “requirements of the offer documents”.

Wanaka-based fund manager Greg Marshall, of Logic Fund Management, who has a trader background in bonds and hedge funds, said in 2006 he advised trusts in New Zealand not to get involved because of the “extreme complexity” of how the portfolio was managed and the risk involved.

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