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ComCom slams Forbarr over Credit Sails

The Commerce Commission has taken aim at Forsyth Barr over its role in the promotion of Credit Sails derivative products that saw investors lose more than $70 million.

Thursday, March 7th 2013, 12:35PM 5 Comments

by Niko Kloeten

The Commission concluded that the parties involved in the promotion of the products, including Forsyth Barr and Calyon Hong Kong, likely breached the Fair Trading Act.

However, it reached a $60 million settlement with the companies instead of prosecuting as it believed this would return more to investors, many of whom are elderly.

Because Calyon is not a New Zealand company, the Commission had no legal power to force it to take part in the investigation; therefore, it agreed to take evidence from Calyon on the basis that it was confidential.

But it was able to publicise email correspondence by Forsyth Barr showing it pushed back against recommendations by both Calyon to tone down the marketing of the product.

An email by a Forsyth Barr to Calyon in April 2006 said: “One of the deletions we feel is harmful to the marketing of this offer. Remember we catch more flies with honey than vinegar!”

Another email a few days later said that Forsyth Barr wanted a section on back testing to be removed.

“The graphs in particular show a large number of incidences were the returns are materially lower than we expect which is a big marketing negative, and there is no obligation for you to include this  information anyway.”

The Companies Office raised concerns about the use of the words “capital protection” and “principal protection” in the Credit Sails prospectus, as well as the promised 8.5% interest rate, which it said could be misleading without further clarification.

Most (but not all) of the references to capital and principal protection were removed but the 8.5% figure remained prominently displayed.

“The Prospectus described Credit SaILS in a manner that, in the Commission’s opinion, was difficult for a layperson to understand.

“The risks were set out in sections 3.5 and 3.6 of the Prospectus, but in relation to the Momentum Notes, we considered that the disclosure of the risks was inadequate and misleading, and was also inconsistent with other statements in the Prospectus and in marketing materials.”

Forsyth Barr said that it was not a promoter of Credit SaILS under the Securities Act and that Credit SaILS was a CALYON product.

“Forsyth Barr’s position is that the role it played in the issue was consistent with normal market practice for a lead manager and was no different to the involvement of other professional parties assisting the Promoter in an offer such as lawyers and auditors.”

Forsyth Barr said the AA rating of Credit Sails by S&P was central to its decision to recommend the investment to clients.

“It relied heavily on the rating and believed that recommending a security with a rating of AA was a sound basis for its involvement.”

Niko Kloeten can be contacted at niko@goodreturns.co.nz

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Comments from our readers

On 7 March 2013 at 3:17 pm david jansen said:
When credit sails came to market, it created a significant stir in institutional circles. "you can't do that" was the catch phrase. An investment vehicle that invested in Investment Grade Corporate Bond Indices where the collateral portion ( the bit that supports the so-called capital protection )being a AA tranche in an Investment Grade Corporate Bond CDO. The issue was these two components were highly correlated. Approx 40 to 50% of the corporate names represented in the indices, were also held in the CDO's collateral pool. So negative credit events impacted both the component parts of the Fund. Historically, the collateral part of these structures was usually AAA Gov't bonds because they needed to be uncorrelated with the other component part. The Credit sails hybrid probably didn't generate sufficient yield using the historic approach so they pimped-it to meet local return thresholds.
On 7 March 2013 at 10:36 pm Simon Burnett said:
These crises (this one and the ING/ANZ frozen funds case) will happen again and again unless everyone in the investment banking trade:

1. starts to read The Financial Times, Bloomberg and (for example) Grant’s Interest Rate Observer (and that’s just for starters); and

2. stops believing that manager awards have any meaning

AND the NZ financial media stop publishing these awards and start doing some genuine analysis

If you believe what they said, neither ING nor ANZ even realised what the rest of the world knew: that the Minsky Moment hit in August 2007 when BNP Paribas announced it could not value some of its funds because they were filled with toxic garbage.

At the same time, banks stopped lending because they knew that nobody any longer had any idea who held the toxic bits and pieces.
On 8 March 2013 at 5:59 am Andrew Davidson said:
David Jansen adds some jargon-laden comment, the same double speak that was used throughout the whole DYF and RIF debacle. . .were these funds also "pimped" with CDO's to generate target yields.I would suggest its an oxymoron to put Investment Grade Corporate Bond CDO in one sentence
On 8 March 2013 at 9:08 am btw said:
I find it hard to understand how FMA and NZX can be sitting on their hands on this, and its outrageous that it comes down to ComCom to provide some regulatory comment on the matter.
FB are on record recently saying that they did nothing wrong - so presumably will do the same again! How they have any clients is beyond me. Given the inactivity by the regulators and effective condoning of FB behaviour it seems the only protection for clients remains the "buyer beware" model - hardly conducive to growth in the industry.
On 8 March 2013 at 11:16 am brent sheather said:
Absolutely right btw..why are these other institutions silent..FMA are probably busy but NZX seems more interested in stealing mighty river from ordinary New Zealanders..having said that I have registered my interest...

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ANZ 5.79 5.05 ▼5.25 5.59
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HSBC Special - - - -
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Liberty 5.69 - - -
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SBS Bank Special - 4.59 4.85 5.25
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