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Investors in a New Zealand-listed bond have had their interest payments suspended after fall-out from the US credit crisis hit earnings.
Bonds are considered to be a lower risk product compared to shares but the unusually volatile market has forced local company Fidelity Capital Guaranteed Bond to defer paying interest on the first six months of the 6.3-year bond.
One investor, who did not wish to be named, said he was frustrated about the lack of payment because as a retiree he relied on a regular income to top up his New Zealand superannuation.
He said the company should have been aware of the volatile market when the product was launched last year.
The bond is a trading vehicle set up by Auckland-based insurance and investment company Fidelity Life and invested through Tyndall Investment Managers.
First NZ Capital and Westpac were joint lead managers and Westpac provided the capital guarantee on it.
The bond raised $80 million, closing oversubscribed in April last year. It listed $75 million of that on the New Zealand debt market with investors due to be paid 9.25 per cent interest in two annual instalments.
The bond went ahead with its first interest payment in July despite warnings that it may have to suspend payments on the back of a shortfall following poor performance in the fund. But the bond company wrote to investors this week saying that the second payment, due to go ahead today, would not be coming in.
In the letter the company said: "We regret to advise that on the interest payment date of 15 January 2008 a Capital Guaranteed Bond shortfall will arise. Thus, the scheduled payment of interest will be suspended in full."
Despite the assets of the fund growing from $75 million to $76.1 million, the company said it did not have enough money to pay the full interest owing and was not allowed to make a partial payment under its trust deed.
The company said the interest would be carried over until the next payment date of July 15 and interest would be accrued on top of the interest due until then.
But there is no certainty investors will receive their money on the next payment date either. Westpac said the capital guarantee would not be affected.
Fidelity Life chief executive Milton Jennings said the poor performance was specifically attributable to the volatility in the credit market.
"If it had been for the five years up until June 2007 it would have been fine - the timing was just totally unfortunate."
The fund lost $2.8 million in its first few months of trading.
First NZ Capital head of investor service Martin Poulsen said the bond had been attractive because of its high interest rate and indirect relationship to credit. But, he said, global interest rate volatility had hurt the fund and a number of other similar products.
"There are a range of structured products where the value has dropped."
Poulsen said the interest deferral did not appear to have occurred as a result of any mistakes on the part of the fund manager but seemed to be due to market volatility.
He said the fund was about investing in the skill of Tyndall - a company which had run money successfully for some time. Investors could sell out of it because it is listed on the NZ debt market, he said.
Forsyth Barr fixed interest specialist Brent Stephen said it was rare for a bond to defer payment but the strategy remained sound and he expected it to be back on track when the market settled down, possibly in the second half of the year. He said problems in both the bond and equity markets meant that "cash was king".
The bond invests in bank deposits and then uses the interest from the deposits to write financial instruments called options. There are two types of options - a call option gives an investor the right to buy a specific quantity of a security at a set price for a set time while a put option provides the option to sell. The options in the Fidelity fund are mainly taken on Australian and US 10-year government bonds. The volatility in the bonds has been caused by a lot of investors buying them because they are seen as less risky.
