Macquarie's $200m offer aims to entice worried debenture investors

Macquarie Equities is seeking to cash in on the so-called "flight to quality" by investors getting out of finance company debentures, by offering up to $200 million worth of a new commodity-backed fixed interest product.

Macquarie's Commodity Bonds, launched yesterday, will pay at least 8.2 per cent a year for five years. Macquarie expects they will be listed on the NZDX debt market with at least an "investment grade" rating from international agency Standard & Poor's.

It is believed the issue will not proceed unless it achieves a satisfactory interest rate and credit rating of at least AA - which will be finalised on the closing date of August 31.

The initial public offer is for $100 million of the bonds with the right to take subscriptions for up to a further $100 million.

Macquarie Equities head of financial services John Rowley said the offer was aimed at investors who might otherwise have sought finance company debentures or other New Zealand economy-linked fixed interest investments.

He said the investment climate had changed this year "with many income investors now more acutely aware of the increased risks of chasing high yields".

"Every night of the week there's someone talking about finance companies," he said.

"We're trying to give people some comfort that the chance of them getting their money back and getting a decent yield on the way through is pretty robust."

The bonds would offer a competitive yield, "without exposing investors to the specific risks" of a softening economy.

Funds raised through the issue would be managed by Societe Generale subsidiary TCW Asset Management which would use the money to write or sell "put options" on a range of commodities including aluminium, copper, gold, oil and gas.

A put option gives the buyer the right to sell the underlying security or commodity at a predetermined price.

By buying put options, the owner of a security or commodity can insure the value of their holding at that price minus the premium paid for the option.

However, Craig Swanger, of Macquarie Financial Services Group, said the strike prices for the options TCW would write were well below long-run average commodity prices and, as such, were less likely to be exercised. Macquarie has estimated the risk of default on the investment at 0.5 per cent.

As well as the bonds being listed on the NZDX, Rowley said investors could also take advantage of a monthly buyback opportunity to sell out early at close to the price they initially paid.