Fidelity investors get $11m windfall

About 1400 investors in a listed bond are to receive a $10.8 million windfall after an 18-month wait for their money.

The $75 million Fidelity Capital Guaranteed Bond was supposed to pay investors 9.25 per cent interest a year in six-monthly instalments.

But it hit trouble in January 2008, just six months into the 6.3-year investment period and suspended the interest payments because of fallout from the US credit crisis.

Yesterday product provider Fidelity Life said the bond would make its January payment on time and had regained enough ground to pay the missed interest payments for all of last year as well as the penalty interest for failing to make the payments on time.

"We always had confidence in the investment philosophy of the fund. But no one expected the credit crunch like what we had. It certainly hasn't been the smooth sailing we expected when we launched the bond," said Fidelity Life chief executive Milton Jennings.

Jennings said the bond, which invests in bank deposits and then uses the interest to take out financial instruments called options over the US 10-year Government stock index, had suffered from the volatility in the markets caused by the credit crunch and global financial crisis.

"When you go through a volatile period like we had in 2007, writing options we were making some big payments and losing money."

But Jennings said now the markets were back on track the bond was able to earn a good income and it had risen 40 per cent in value after hitting a low of $61 million.

"Income earned after very volatile periods like that is quite substantial - that is why the fund has recovered."

Jennings said he was confident of being able to keep up the payments.

"We are still earning in excess of what we were expecting when we launched the bond."

In 2007 it had expected to earn interest of 15 to 20 per cent and at the moment it was around 20 to 25 per cent.

"That will keep coming down over time but there is still very good earning ability there and plenty to cover the 9.25 per cent interest."

However, the interest is not guaranteed and Jennings said a sharp movement in interest rates in the US could have a negative affect on the bond.

"There are still risks."

Unlike with finance companies, investors who weren't happy with the lack of interest payments were able to sell out of the bond on the NZX debt market.

Over the past year there were 117 trades and bonds have sold at a 24 per cent discount.