Macquarie bond signals shake-up

By PAUL PANCKHURST

"Never invest in a business you cannot understand," said one of the world's most famous investors, Warren Buffett.

The quote was recycled in sharemarket chatter yesterday as sharebrokers cast an eye over the first in a looming wave of new debt products for retail investors.

Macquarie Equities unveiled a $100 million to $150 million issue of five-year bonds that offer New Zealand investors higher than usual returns for an investment-rated product.

But the bonds also expose investors to the complexities - and sophisticated risk calculations - of the global credit derivatives market, where banks structure deals to hedge against credit risks.

The Macquarie product - called "Generator Bonds" - is backed by a collateralised debt obligation, or CDO, which offers a "synthetic" exposure to a portfolio of debt issued by 100 companies around the globe.

The firms span Europe, North America, Hong Kong, Australia and New Zealand. The big names to be highlighted in marketing include General Electric, Reuters, Rolls-Royce, and Toys 'R' Us.

Generator Bonds will pay between 7.75 per cent and 8.25 per cent a year - the rate will be set after the offer closes on August 13 - and are expected to bear an A-minus rating from Standard & Poor's.

That is a big jump up from existing pricing such as, say, the 6.35 per cent yield for the five-year bonds that were issued in April by Mighty River Power and rated BBB by S&P.

New Zealand's retail debt market is widely regarded as mispriced, investors taking on too much risk for too little return, and some brokers hope yesterday's launch is the start of a correction.

But one debt market expert predicted the emergence of a two-tier market with investors willing to pay a premium for issues from local names they knew and trusted.

A $400 million-plus bubble of retail debt issues is looming.

ABN AMRO Craigs is set to reveal two more CDO products tomorrow and GPG is working on setting the price for a $200 million capital note issue.

Brokers say Craigs is seeking $30 million from investors for a CDO product with a BBB rating and an 8.75 per cent return, and $40 million for one with an AA-minus rating and a 7 per cent return.

At ASB Securities, managing director Tim Preston said the new products needed to be matched to the right investors - the ones who understood them.

"They are not something that we will promote to general retail investors en masse. The danger is that people will just see the credit rating and the interest rate and not look too much further."