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Kauri Notes - High targeted returns

Savings and Loans has launched a capital protected investment backed by Merrill Lynch.

Tuesday, July 10th 2007, 11:08AM
Summary of the key features of Kauri Notes invested in Merrill Lynch Prosper Notes Series II

Background
Savings & Loans Superannuation and Investments Limited is a funds management organisation with a focus on providing Securities that are:

  • Capital guaranteed
  • Provide regular income
  • Offer the opportunity to earn higher returns
  • Have a clear secondary market mechanism for sell back.

Kauri Notes, the proceeds of which are invested in NZD Merrill Lynch Prosper Notes Series II, will be attractive to those clients wanting to diversify their finance company debenture holdings and other fixed interest securities into rated investments with higher returns but which also provide regular income.

Kauri Notes – High targeted returns
Five hypothetical Prosper Notes back tests illustrate annualised returns between 11.61% – 17.13%*.

Regular quarterly coupon payments
Kauri Notes are an interest bearing debt security designed to provide investors with a regular coupon rate of 9.50% per annum return paid quarterly, over the 7 year 3 month term of the Kauri Notes.

Interest guarantee in respect of the first eight coupon payments from the Prosper Notes – Series II
As well as the capital guarantee, the payment of the first eight quarterly interest payments of the Kauri Notes are supported by a Prosper Notes coupon interest guarantee from Merrill Lynch & Co., Inc which is rated AA-. Subsequent coupon payments are subject to the performance of the Permal Financials & Futures portfolio of funds into which Merrill Lynch invests the proceeds of Prosper Notes. To pay each subsequent quarterly coupon the net asset value of Prosper Notes must be above $1.02375 for each $1 invested. If not the coupon is deferred 90 days until the next coupon date and the asset value is sufficient to make the payment. This means the actual rate of return achieved by Kauri Note investors could be higher or lower than 9.5% pa.

Higher Returns through Uncapped Redemption Premium potential
The opportunity for higher returns is provided by payment of a redemption premium at maturity. In the event that the performance of the Prosper Notes generates annualised interest returns for Savings & Loans Securities in excess of 9.50% per annum then it will pay to the Kauri Noteholders 100% of this excess as a redemption premium at the maturity.
Merrill Lynch will generate these returns by implementing a constant proportional portfolio insurance mechanism ("CPPI") which is designed to maximise the exposure to the Permal FX, Financials & Futures portfolio of funds at the same time as ensuring that the principal and first eight coupon payments are always protected. This mechanism enables investors to gain the benefit of up to a maximum exposure of 200% of their investment to the Permal portfolio of Funds (subject to the funds performance) through Merrill Lynch lending the additional amount at 0.5% over interbank interest rates. Where the Permal portfolio achieves good returns additional amounts are invested in the fund. If performance declines the investment is de-leveraged and amounts are notionally invested in risk free bank deposits.

Secondary market Sell Back facility
Kauri Notes can be sold back to Savings & Loans early by Noteholders each month, subject to certain circumstances.
The size of the Permal fund, the very liquid instruments in which the Fund managers invest and Merrill Lynch International's secondary market trading experience all assist in making this sell back feature possible. Sell back prices will be linked to the net asset value of the Prosper Notes.
If a net asset value premium (or discount) above (or below) issue price has been generated, the sell back price will include this net asset value adjustment.

A diversified investment in the Permal FX, Financials & Futures Limited portfolio (the Permal Fund)
The net proceeds raised from the issue of the Prosper Notes – Series II will be invested in the flagship Permal portfolio of funds. The US$ 7.9 billion Permal Fund portfolio is diversified across more than 50 different managers. Investments are made in the global marketplace with exposure to the financial, metal, energy, agricultural, currency and other markets. The Permal Fund also achieves diversification through the range of investment styles and trading strategies in numerous U.S. and international currency, futures, options, forward and other liquid markets. This Permal fund does not invest in either illiquid sub-prime or high-yield debt securities. It is specifically designed not to be correlated to debt and equity returns in order to maximise its diversification value to an investor. The Permal portfolio of Funds, which has been operating successfully since 1992, has been selected for its long history of delivering real returns to investors in all market conditions, for its resilience to past market shocks over a 15 year period and for the liquidity of the instruments in which its managers invest. Permal's role is to continually monitor risk and to optimise the whole portfolio of managers based on their current performance by adding and removing managers. The Permal fund has a Standard & Poor's AA rating.

Track Record of the Investment Manager
Permal the Investment Manager of the Permal portfolio of funds is a subsidiary of Legg Mason's Wealth Management Division a company listed on the New York Stock exchange. It has over 33 years of experience and as of January 2007 has approximately US$30 billion of funds under management. Legg Mason is a global funds management firm with over US$969 billion of funds under management around the world as at 31 March 2007.

Merrill Lynch & Co., Inc the Guarantor rated AA
Merrill Lynch is one of the world's leading wealth management, capital markets and advisory companies, with offices in 37 countries and territories and total client funds under management of approximately US$1.6 trillion. Merrill Lynch is ranked number 22 in the Fortune 500 (being the list of the 500 largest public corporations in the United States by gross revenues aggregated by Fortune magazine). Merrill Lynch & Co., Inc, the guarantor has a AA-, AA-/A-1+, Aa3 credit rating (Fitch Ratings, S&P's, Moody's respectively).

Investors Interests protected through appointment of Trustee
The Perpetual Trust is acting in a trustee role on behalf of Kauri Notes investors. The Trustee holds a security deed over the Merrill Lynch Prosper Notes in favour of the Kauri Noteholders. The initial value on the date of allotment of the Kauri Notes will be $1.00 per Kauri Note.

Brokerage
Savings & Loans will pay to advisors 1.5% brokerage on all client subscriptions.

Further Information
To receive further information, an investment statement and prospectus can be obtained from www.kaurinotes.co.nz or call 0800 728464 (0800 Savings).

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ANZ Special - 2.29 2.69 2.79
ASB Bank 4.45 2.29 2.59 2.65
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BNZ - Classic - 2.29 2.59 2.79
BNZ - Mortgage One 5.15 - - -
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BNZ - Std, FlyBuys 4.55 2.89 3.19 3.39
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China Construction Bank Special - 2.65 2.65 2.80
Credit Union Auckland 5.45 - - -
Credit Union Baywide 5.65 3.95 3.85 -
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First Credit Union Special 5.85 2.95 3.45 -
Heartland 3.95 2.89 2.97 3.39
Heartland Bank - Online 2.50 1.99 2.35 2.45
Heretaunga Building Society 4.99 3.50 3.40 -
HSBC Premier 4.49 2.25 2.35 2.65
HSBC Premier LVR > 80% - - - -
Lender Flt 1yr 2yr 3yr
HSBC Special - 1.99 - -
ICBC 3.69 2.25 2.35 2.65
Kainga Ora 4.43 2.79 3.04 3.13
Kainga Ora - First Home Buyer Special - 2.25 - -
Kiwibank 3.40 3.20 3.50 3.50
Kiwibank - Offset 3.40 - - -
Kiwibank Special 3.40 2.35 2.65 2.65
Liberty 5.69 - - -
Nelson Building Society 4.95 3.20 3.24 -
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The Co-operative Bank - First Home Special - 2.09 - -
The Co-operative Bank - Owner Occ 4.40 2.29 2.59 2.79
The Co-operative Bank - Standard 4.40 2.79 3.09 3.29
TSB Bank 5.34 3.09 3.29 3.45
TSB Special 4.54 2.29 2.49 2.65
Wairarapa Building Society 4.99 3.55 3.49 -
Westpac 4.59 3.09 3.29 3.39
Westpac - Offset 4.59 - - -
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Westpac Special - 2.29 2.69 2.79
Median 4.54 2.79 2.99 2.96

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