HY-FIs and 'scary' finance houses

By PAUL PANCKHURST

Retail investors wary of the novel and sophisticated investment products linked to the global credit derivatives market should be more worried by existing risks in the New Zealand fixed-interest market.

That was one of the arguments this week from the two sharebroking firms that unveiled products using "synthetic" instruments to expose investors to pools of global corporate debt.

The products - from Macquarie Equities New Zealand and ABN Amro Craigs - use structures called collateralised debt obligations or CDOs to ship in the higher yields available overseas.

The products tackle the perceived mispricing that gives New Zealand retail investors too little return for too much risk.

The challenge the brokerages face is making retail investors comfortable with offerings that are normally the domain of sophisticated players in the wholesale markets.

The key selling point: investment grade ratings for the new products from credit rating agency Standard & Poor's.

At yesterday's launch of the two new securities from ABN Amro Craigs, chairman Neil Craig said most bonds and capital notes in New Zealand went unrated because the issuers knew the ratings would be "pretty poor".

His firm's new products are rated AA-minus and BBB by S&P.

Bearing the brand name "HY-FIs" - short for "high yield, fixed interest" - the products have five-year terms and offer 7 per cent and 8.75 per cent returns, a big jump up from existing rates.

The CDO-linked products can also be compared with the fixed-interest investments offered by a plethora of finance houses.

An ABN Amro Craigs staff member, Frank Jasper, referred to the "scary amount of money" flowing into those houses - "an accident waiting to happen".

The "HY-FIs" products are linked to a reference portfolio of $1.6 billion of debt issued by 70 companies around the globe. Investors are being asked for $70 million to $150 million in an offer that opens on Wednesday and closes on August 13.

Macquaries' Generator Bonds issue seeks $100 million to $150 million and is expected to be rated A-minus.