January 31

There has been a lot of media attention on the problems that investors have suffered from the collapse of a number of finance companies in recent times.  In contrast there has been little coverage of problems investors in certain structured products have endured as well. 

An example of such a structured product is Macquarie New Zealand Fortress Notes (MFN).  It was announced to the NZX today that the net asset value (NAV) of MFNs had fallen from $1.00 (when they were issued in 17/5/2005) to an estimated $0.55 cents as at 29/1/08.   This dramatic fall is an example of the turmoil in global credit markets that has hit home for the $28m of New Zealand investor monies that went into this fund back in 2005. 

Macquaire New Zealand Fortress Notes – Net Asset value

Month ending	NAV
29 January 2008	$0.55
31 December 2007	$0.68
31 December 2007	$0.98
31 December 2007	$1.00
17 May 2005	$1.00

Back in 2005 credit risk levels were perceived to be low and therefore the margin over Government Stock an investor received for investment and non-investment grade corporate debt was at historically low levels.  Given investors’ ongoing desire for high yielding investments various structured products were brought to the New Zealand market place and MFN was but one example.

The MFN prospectus was issued back in March 2005 with its front page stating that MFN was “An income investment aiming to deliver a high yield to New Zealand investors”.

Reading through the document is a reminder how times have changed so dramatically with the US sub-prime crisis.  In essence MFN is a vehicle that could leverage up to six times into a portfolio of sub-investment grade debt.  The prospectus is littered with simulated examples of expected investment yields based on various leverage and default rates.  The dramatic moves in the credit markets and the resultant lack of liquidity have unfortunately made such simulated examples virtually meaningless from an investor’s perspective.

One wonders how many of the MFN investors actually understood the risk they were taking on board at the time.  The 99 page prospectus and investment statement is difficult even for investment professionals to sift through let alone the person in the street.  

These investors now face real uncertainties on whether the currently unrealised fall in NAV will have to be realised.  At issue is key funding for the remaining senior loans in the portfolio that needs to be refinanced by mid-April 2008.  This may prove to be very difficult in the current environment and if refinancing is not achieved then the portfolio of senior loans may need to be sold to meet its debt obligations, thus crystallising a severely shrunken NAV.   
Anthony Quirk – 31 January 2008