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Investors Support Action

September 19, 2012

Investors support action

 
By Simon Hartley on Thu, 20 Sep 2012

Published by: Otago Daily Times

More than 500 parties – representing almost 20% of failed $91 million offshore investment fund Credit Sails – have signed up to back potential legal action.

The Commerce Commission was expected to complete a 20-month investigation by July or August, but expectations are now for the earliest announcement to be by the end of September.

While Credit Sails appeared a low-risk investment, Credit Sails was an extremely complicated investment vehicle whose demise was prompted by the failure of Lehman Brothers in the US and two Icelandic banks.

Southern investors understood to have lost their capital include hospice, youth, orphan and three religious trusts.

So far 500 parties representing 18%, or about $16.5 million of investments in the original $91.5 million lost, have signed up for a possible private group action, overseen by Wanaka-based Logic Fund Management, Logic’s chief executive Greg Marshall said in a newsletter this week to Credit Sails investors.

“Logic Fund Management has been in discussions with the [Commerce] Commission and they will be reporting their results by the end of September, although this may be subject to a delay,” Mr Marshall said.

Logic wants to reach a 25% majority threshold, where investors sign over their rights to about $2.28 million left over in the Credit Sails structure, which Logic would use to investigate and potentially fund legal action.

“Depending on the [commission] result, the [Logic’s] investigative committee will weigh the options and decide whether or not to pursue the action as supported by more 500 parties from the Credit Sails community,” he said.

Mr Marshall said the strategy of Logic’s investigative committee has been to “hold off on this action”, until the Commerce Commission delivers findings from its investigation.

“We expect the possible results will be either a settlement substantial enough for all investors, or no settlement, and the commission to lead a lawsuit against the parties concerned,” Mr Marshall said.

He said “litigation funders” were contacting Logic, seeking to make representations and he claimed an unnamed party had filed separate proceedings in the High Court.

Credit Sails had been arranged by the French investment bank Credit Agricole through a subsidiary company, Calyon, issued by the Cayman Islands-registered Credit Sails Ltd and lead-managed and underwritten by Forsyth Barr in New Zealand.

Dunedin-based Forsyth Barr has denied any wrongdoing, saying in the past the “reality” was that Credit Sails investment did not live up to the Standard and Poor’s rating.

Credit Sails was a complex portfolio of “collateralised debt obligations” based on holding corporate bonds.

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 and Poor’s, in a portfolio comprised mainly of about 120 blue chip companies.

Six companies in the bond portfolio defaulted on loans, including two Icelandic banks and Lehman Brothers, and by late 2008 the bonds of Credit Sails, which traded on the New Zealand debt exchange, were worthless. The Commerce Commission has described Credit Sails earlier this year as “virtually worthless”.


CDOs
Collateralised debt obligations
• CDOs are repackaged asset-backed securities which typically own a variety of debt and are sold in slices to investors, including individuals, funds and banks, with differing interest yields, depending on the rating agency-assigned credit risks.

• The United States sub-prime (cheap) mortgage market was sliced into the CDOs but lost value when borrowers could not meet (later increased) house repayments, triggering mortgagee sales and the sub-prime crisis. Combined with other over-extended US mortgage lenders, and with house values plummeting instead of rising, the global financial crisis was triggered.

• While global funds and banks are still attempting to unravel exactly what debt they purchased in some CDOs, Australian banks, and by extension their New Zealand subsidiaries, had invested little in the CDOs and were relatively unscathed.


– simon.hartley@odt.co.nz

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