8%pa
Investment grade quality
Generating a better return for New Zealand investors
The initial offer of Generator Bonds has now closed. However, Generator Bonds will be quoted on the NZDX (NZX Debt Market) on August 27, 2003. The stock code will be GTR010.
The final interest rate has been set at 8%pa, and Standard & Poor's have issued Generator Bonds with an A- credit rating.
Key dates
| Issue date |
August 20, 2003 |
| Quotation date |
August 27, 2003 |
| Date of first interest payment |
November 20, 2003 |
| Maturity date |
August 20, 2008 |
Summary of the offer
Generator Bonds are a new investment grade bond issue from Generator Bonds Limited (a subsidiary company of Macquarie New Zealand Limited). Generator Bonds give New Zealand investors one of their first opportunities to share in the higher returns earned in overseas fixed interest markets, through an A- rated bond linked to the credit risk on a portfolio of debt issued by 100 international and domestic investment grade companies.
Key features:
-
Return 8.00%pa, paid quarterly
-
A- credit rating from Standard & Poor’s
-
5 year term
-
Returns ultimately linked to the credit risk on a portfolio of debt issued by 100 international and domestic investment grade companies
-
Tradeable on the secondary market
-
Denominated in NZ$ - no currency risk
-
No entry or ongoing fees
-
Minimum investment $5,000
-
Early bird interest 8.00%pa paid until offer close date
-
Open period July 17, 2003 - August 13, 2003
 Back to top
The proposition is simple
With a long-term trend of falling interest rates, New Zealand investors are increasingly seeking an opportunity to secure steady income over the medium term. Generator Bonds deliver such an opportunity by accessing the higher premiums available on overseas corporate debt and through the use of credit linked notes. These returns are normally only available in New Zealand to institutional investors.
As Figure 1 below shows, overseas investors can earn greater credit spreads (premiums over the risk-free rate i.e. Government-issued debt) from rated corporate debt (in this example BBB rated) than New Zealand investors can.
 |
Tipping the balance in New Zealand investors’ favour
Generator will access overseas fixed interest markets by using a commonly used debt market instrument called a credit linked note (CLN). The reason that Generator Bonds can offer this return is twofold: firstly, relative to government bonds, overseas investors have historically been able to earn more from corporate bonds than New Zealand investors; and secondly, credit linked notes often pay a higher yield than similarly rated corporate bonds.
|
Back to top
Why hasn’t this been done before in NZ?
While common overseas, creating the financial structures like those behind Generator Bonds can be difficult and expensive to do without specialist advice and resources. Therefore traditionally only institutions in New Zealand have taken advantage of this imbalance.
Changing the risk/return equation
Traditionally, fixed interest investments paying 8.00%pa or more have usually lacked a credit rating - an independent assessment of the quality and financial security of a fixed interest investment. Without such a credit rating, it is very difficult for investors to gauge the risks involved.
There are no such problems with Generator Bonds.
As the chart below shows, to receive a return of approximately 8.00%pa from a fixed interest investment over the past 6 months, New Zealand investors would have had to invest in speculative grade investments, or in investments with no rating at all.
Compared to investment grade bonds, speculative grade bonds are nearly 18 times more likely to default. This number jumps to 25 times when compared to A- rated bonds. Do these default rates for speculative grade bonds match your clients’ appetite for risk?*
*Source: Standard & Poor’s "Corporate Defaults Peak in 2002 Amid Record Amounts of Defaults and Declining Credit Quality - Hazards Remain" February 2003
Back to top
Standard & Poor’s credit rating
A credit rating is an assessment of a company’s or investment’s capacity to meet its financial obligations i.e. pay its debts. An investment grade rating (ie S&P rating from BBB- to AAA) is one of the most dependable credit risk measures in the world. Investment grade is the benchmark commonly used by institutional investors to determine the quality of an investment opportunity. The table below gives descriptions for each S&P credit rating.
| Investment Grade |
AAA
|
An obligation rated ‘AAA’ has EXTREMELY STRONG financial security characteristics. ‘AAA’ is the highest rating assigned by Standard & Poor’s. |
|
AA
|
An obligation rated ‘AA’ has VERY STRONG financial security characteristics, differing only slightly from those rated higher. |
|
A
|
An obligation rated ‘A’ has STRONG financial security characteristics, but is somewhat more likely to be affected by adverse business conditions than are obligations with higher ratings. |
|
BBB
|
An obligation rated ‘BBB’ has GOOD financial security characteristics, but is more likely to be affected by adverse business conditions than are higher rated obligations. |
| Term |
(+) or (-)
|
The ratings from ‘AA’ to ‘CCC’ may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories. |
| |
|
|
| Speculative Grade |
BB, B, CCC, CC & C
|
An obligation rated ‘BB’ or lower is regarded as having vulnerable characteristics that may outweigh its strengths. ‘BB’ indicates the least degree of vulnerability within the range; ‘C’ the highest. |
Standard & Poor's credit rating - more information
 Download Standard & Poor's final report (pdf 115KB)
Download Standard & Poor's final credit rating letter (pdf 100KB)
Read the Standard & Poor's research article on CLNs and CDOs 
Standard & Poor's materials © 2002, 2003 by Standard & Poor’s, A Division of The McGraw-Hill Companies, Inc. Reproduced with permission of Standard & Poor’s.*
Back to top
Diversification across companies, industries and countries
Compared to a single-entity corporate bond from which returns are specific to a single company, returns on Generator Bonds are linked to a portfolio of debt issued by 100 international and domestic companies.
Many New Zealand investors generate the bulk of their investment income from inside New Zealand, through investments such as bonds, capital notes, managed investments etc. These are usually all linked to a common risk - the New Zealand economy. Generator Bonds provide a good opportunity for investors to diversify their income stream outside New Zealand - crucially, this is done without exchange rate risk.
Back to top
Which companies are in the Generator Bonds portfolio?
Download the latest portfolio company ratings (pdf 60KB)
The Generator Bonds portfolio is structured so that 7 individual BBB- companies within the portfolio could be downgraded by S&P before Generator Bonds would lose its own A- rating. The number of companies that can be downgraded without impacting Generator Bonds’ credit rating is higher for higher rated companies.
Who’s involved in Generator Bonds?
Standard & Poor’s (S&P)*
S&P is one of the world’s leading credit rating agencies. Investors globally look to S&P’s credit ratings for objective, insightful analysis on the ability and willingness of governments, corporations and others to repay their debts on time and in full with trillions of debt rated globally. US$1.5 trillion in investors' assets are indexed to S&P’s equities indices, including the premier U.S. portfolio index, the S&P 500.
Scotia Capital
Scotia Capital represents the global corporate and investment banking businesses of the Bank of Nova Scotia/Scotiabank Group. The Bank of Nova Scotia, established in 1832, is Canada’s second largest bank with:
- 1,850 branches and offices in 50 countries
- 49,000 employees
- C$30 billion (NZ$38 billion) market capitalisation
Scotia Capital, through its Dublin, Ireland affiliate, Scotiabank (Ireland) Limited, has acted as an arranger of the synthetic CDO structure under which an unaffiliated special purpose vehicle, Kiwi I (CDO) Ltd, will issue a series of credit linked notes - one of such series being the A- rated note proposed to be purchased by Generator Trust for the use in Generator Bonds.
Macquarie Equities New Zealand Limited
Macquarie Equities New Zealand Limited (Macquarie) is part of the worldwide Macquarie Group of companies, providing investors with specialist investment, advisory and financial services through over 4,700 employees in 18 countries. Macquarie specialises in designing innovative investment solutions specifically for New Zealanders. Macquarie is promoting Generator Bonds on behalf of the issuer, Generator Bonds Limited.
Generator Bonds Limited is a subsidiary company of Macquarie New Zealand Limited, and was set up specifically to issue Generator Bonds.
More information - materials to download
Download Adviser flyer (pdf 95KB)
Download Investor brochure (pdf 165KB)
Advertising and marketing - more information
Download a copy of the Generator Bonds ad (pdf 65KB)
Download sample direct mail letter - risk/return (pdf 25KB)
Download sample direct mail letter - diversification (pdf 25KB)
Standard & Poor's credit rating - more information
Download Standard & Poor's final report (pdf 115KB)
Download Standard & Poor's final credit rating letter (pdf 100KB)
Read the Standard & Poor's research article on CLNs and CDOs
Standard & Poor's materials © 2002, 2003 by Standard & Poor’s, A Division of The McGraw-Hill Companies, Inc. Reproduced with permission of Standard & Poor’s.*
Back to top
Generator Bonds are issued by Generator Bonds Limited, a subsidiary company of Macquarie New Zealand Limited, incorporated in Australia in its capacity as trustee of the Generator Bonds NZ. No. 1 Trust and constitute first ranking secured obligations of Generator Bonds Limited, in its capacity as trustee of that trust. The combined Prospectus and Investment Statement dated July 16, 2003 ("the Offer Document") has been registered with the New Zealand Companies Office.
Investments in Generator Bonds are not deposits with or liabilities of Macquarie Bank Limited nor any member of the Macquarie Bank Group and are subject to investment risk, including possible delays in repayment and loss of income and or principal invested. None of Macquarie Bank Limited, Generator Bonds Limited, Macquarie Equities New Zealand Limited, Macquarie New Zealand Limited or any member of the Macquarie Bank Group guarantees the performance of Generator Bonds nor do they guarantee the repayment of the capital from Generator Bonds.
Macquarie Bank Limited is a company incorporated in Australia and authorised under the Banking Act 1958 (Australia) to conduct banking business in Australia. Neither Macquarie Bank Limited nor any member of the Macquarie Bank Group are registered as a registered bank in New Zealand by the Reserve Bank of New Zealand under the Reserve Bank of New Zealand Act 1989 (New Zealand).
*Standard & Poor’s consents to the distribution of the advertisement with the statements containing or referring to the name “Standard and Poor’s” in the form and context in which they are included in this advertisement, and confirms that it has not, before the date of distribution of this advertisement, withdrawn that consent. Standard and Poor’s confirms that neither it, nor any of its employees or officers, are intending to be officers, directors, employees or professional advisers to Generator Bonds Limited.
Standard & Poor’s Ratings Services is a global leader in objective, insightful risk analyses and evaluations of the creditworthiness of issuers world-wide. For more information on Standard & Poor’s ratings, products and services, visit http://www.standardandpoors.com
Neither the credit linked notes nor the Generator Bonds constitute obligations of The Bank of Nova Scotia or its affiliates (collectively, “Scotia”). The Generator Bonds are not sponsored, endorsed, promoted, sold or guaranteed by Scotia and nothing herein shall be construed as constituting a warranty or representation of Scotia as to the advisability or suitability of investing in the Generator Bonds. Apart from this paragraph, Scotia has not been involved in the preparation of this Adviser Flyer and shall in no way be liable for its content.
You should always consult with your investment or other financial adviser to determine whether investment in Generator Bonds is suitable for your particular financial needs, circumstances and or objectives.
Back to top
|
