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winner69
05-02-2008, 02:05 PM
Can I assume that these have not been the best of investments

http://stocknessmonster.com/news-item?S=FTN&E=NZSE&N=160135

NAV down to 49 cents ...... and I thought that investing in bonds and fixed interest thingies were safe.

So the concept of 'this new world' with a host of new financial instruments and derivatives and the like that eliminate risk looks like it is all ending in tears

Wonder what the next 'new world' will look like

peat
05-02-2008, 02:41 PM
a general query not relating specifically to these Macquarie notes....

Over the last few years I have noticed a number of 'capital protected' funds where they guarantee the original investment value and I assume risk only a small proportion of it to attain decent returns.

How is this sort of thing panning out in the new risk environment. Have any actually lost their capital ?

macduffy
05-02-2008, 03:10 PM
I don't know how they've been performing but the capital guarantee is generally obtained by placing enough of the investment on compounding term deposit to ensure that 100% of capital is returned after x years. And for that, the bank that provides the t/d also charges a fee!
Not a great idea, imo !

kura
07-02-2008, 02:33 PM
a general query not relating specifically to these Macquarie notes....

Over the last few years I have noticed a number of 'capital protected' funds where they guarantee the original investment value and I assume risk only a small proportion of it to attain decent returns.

How is this sort of thing panning out in the new risk environment. Have any actually lost their capital ?

I recall they were marketed in such a way, that you had all of the upside of investing in the sharemarket, but with no risk, as your capital was gauranteed in 5...10 years time. (whatever the life of the particular fund was)

Yes, they would have looked attractive to a naive investor, but once you understood the mechanisim for obtaining the capital gaurantee (as explained by Macduffy) they didn't seem such a good deal.

As to weather any have suffered losses, I don't know. Is there a secondary market where you can trade your capital protected funds prior to maturity ?

Also, back when these were marketed, the portion of capital gaurantee funds they would have invested in, would have been in "triple A" type interest bearing investments, which in present circumstances could turn out to be worthless pieces of paper. In circumstances like that, it would come down to the credibility of the promoter of the fund to make up the difference I suppose.

winner69
07-02-2008, 03:08 PM
In circumstances like that, it would come down to the credibility of the promoter of the fund to make up the difference I suppose.

Guy on the radio this morning saying that Macquaries should come out and say that no matter what happens they will give the punters their money back .... yeah right .... I can't see Macquaries as promoters of these Fortress things doing that no matter what the 'reputational risk' is

Strange isn't it ...... Bridgecorp et al do some dodgy things (loans etc) and fixed interest investors lose out and they are labled as evil conniving rip off bastards by some investors .... but the likes of Macquaries do some dodgy things (investments) and fixed interest investors lose out and at worst Macs will be described as just unlucky and the victims of circumstances beyond their control and their integrity remains intact

Yes you can buy these Fortress Notes on the NZDX - last sale 60 cents --- somebody offering to buy some at 20 cents in the $ -- seller wants 64

kura
07-02-2008, 03:37 PM
W69, I'm not sure if these Notes were actually capital gauranteed (point me in the direction to look up Prospectus, and will have a detailed read)

I think we just got a bit off topic, as I thought these Notes were purely an interest play (theoretically safe) and not invested in sharemarket, so punters wouldn't have needed a capital gaurantee carrot.

winner69
07-02-2008, 04:09 PM
W69, I'm not sure if these Notes were actually capital gauranteed (point me in the direction to look up Prospectus, and will have a detailed read)

I think we just got a bit off topic, as I thought these Notes were purely an interest play (theoretically safe) and not invested in sharemarket, so punters wouldn't have needed a capital gaurantee carrot.

Doesn't look like they were capital guaranteed

Prospectus here
http://www.macquarie.com/nz/acrobat/nz_fortress_prospectus.pdf

Latest investor update said if you managed to buy on market at 60 yield is in excess of 22% ---- but that is absed on interest at 4.5% (on the $1.00) above an assumed bank bill rate of 8.95%


See what happens eh

kura
07-02-2008, 04:18 PM
Yes you can buy these Fortress Notes on the NZDX - last sale 60 cents --- somebody offering to buy some at 20 cents in the $ -- seller wants 64


Thats an interesting price difference, if NTA is 48 cents, then in the absence of a capital gaurantee, then you could expect it to trade round this level.

If it is capital gauranteed, then you could value it at face value of $1, then just discount it for however many years to maturity. (at some discount rate)

In any case, good luck to the guy offering 20 cents for something with a NTA of 48 cents.

macduffy
07-02-2008, 04:27 PM
Given the nature of the assets I'd be very very wary of any valuation of the NTA!
The bid at 20c may turn out to be somewhere near the mark.

Steve
07-02-2008, 05:27 PM
Doesn't look like they were capital guaranteed

If they were capital guaranteed, that would be a sure-fire reason to stay away from them...look at all those apartments that came with rental guarantees!

If you need the guarantee to make it work, then it most likely fails to stack up...

Elwood
07-02-2008, 07:28 PM
Caoital guarantees can and do work well, but as with anything you need to look at how it is achieved. With some of the 10 year types you do risk have no retrun on those funds for those 10 years if things don't work out but they do provide a certain amount of comfort. There are also ones that have a rising Guarantee which can also work well. Key is to have a reputable organisation providing the guarantee, i.e. an international bank. Certainly not something to put all your eggs in but offers a chance to diversify a portfolio for those who cannot do it for themselves.

peterb
07-02-2008, 07:43 PM
Story in the dom today front page of C giving the Maquarie CEO adoration and praise. F* ups like these sorts of notes should be balanced with the bull**** they say about how great these Investment Bank fatcats are. His salary alone would probably make up for the money people have lost on this. (Not at all a suggestion, but an illustration). I bet the manager in charge of these sorts of things got a fat bonus too. I think the media gives us a rather all too glowing perspective of these companies and what they do, and normal people end up pouring money in blindly to unsecured investments because of misleading advertorial media PR.


Disc: not burnt, wouldn't touch the stuff!

winner69
07-02-2008, 09:05 PM
Interesting chart in the prospectus (page 9) showing default rates
over time since 1998

Nothing to do with Fortress Note things but isn't it a worry when you see default rates of about 5% in the 2000/2001 period

Everything is pointing towards the underlying market conditions that were present then happening now

Isn't that a worry - not just for Fortress Notes holders but the financial markets in general .... especially those relying on credit default swaps to protect them

Justa thought

macduffy
11-02-2008, 02:48 PM
Given the nature of the assets I'd be very very wary of any valuation of the NTA!
The bid at 20c may turn out to be somewhere near the mark.

Latest news would indicate that 20c may have been a bit optimistic!

Steve
11-02-2008, 05:27 PM
Latest news would indicate that 20c may have been a bit optimistic!

It looks like the 20c was traded today!

Next bid 10.01c...

Sideshow Bob
11-02-2008, 07:05 PM
Oh the pain.......

Dubdee
12-02-2008, 09:32 AM
PNZFA and PNZFB are two types with an ABN and Barclays bank capital gtee on maturity. Although the capital gtee can be thought of as an amount socked away to grow into $1.00 in 6 years time, that is not what is actually done.

Basically ABN and Barclays allow the whole of the issue proceeds to be invested in risk, monitoring it each day such that even with heavy overnight movements in risk markets NTA exceeds the present value of $1.00 at maturity. This is called Constant Proportion portfolio Insurance "CPPI" the reason these things are failing is that they are highly leveraged to the credit markets which are taking a real caining.

However if you can buy these at leasss that the PV of a ABN or Baclays zero coupon bond the repserent a good bank investment. There is always the possibility that some time over the next 6 years they may pay a coupon

Disc PNZFB

Dubdee
12-02-2008, 02:55 PM
Peat,
heaps of these things have lost part of their capital, but are managed such that there is always enough realisable NTA to buy a zero to provide for the capital guarantee. At that stage they go into coma with the manager realising all the assets and buying a zero coupon bond to provide $1.00 upon maturity

COLIN
12-02-2008, 04:17 PM
Trouble is, there is no actual capital guarantee with these particular ones, of course.
But perhaps the good and kind people from "The Millionaire's Bank" will come to the rescue! (And perhaps there is a Father Christmas after all!)
But then, the retiring CEO only got some $30 mill plus extras, last year, so you can't expect him to feel sorry for those greedy investors who were suckered into his highly-leveraged little schemes.

winner69
12-02-2008, 06:23 PM
Selling for 7 cents in Australia today

zorba
12-02-2008, 07:30 PM
.
Just to clarify, these Fortress thingies are supposed to be worth AU$1.00 guaranteed ?

????

COLIN
12-02-2008, 09:33 PM
.
Just to clarify, these Fortress thingies are supposed to be worth AU$1.00 guaranteed ?

????

Read my earlier post, and check the precise wording in the Investment Statement on their website. It is NOT a guarantee.

Sideshow Bob
04-03-2008, 08:10 PM
Almost gone....

http://business.smh.com.au/macquarie-fortress-close-to-toppling/20080303-1wkq.html

Steve
04-03-2008, 09:23 PM
Selling for 7 cents in Australia today

Must be pretty much untradeable now...

Enumerate
15-03-2008, 08:20 PM
The Macquarie Fortress Notes have had a "haircut" - losses through forced sales into a very weak bond market to satisfy the leverage agreement terms.

At the moment, they have an uncertain NTA of about AUD$0.30, on a weak bond market. They have a "face" NTA of about AUD$0.60, if they can run the loans to maturity and no defaults occur.

They are trading at about AUD$0.065

The next critical stage in MFNHA.ASX's recovery is the refinancing of the leverage deal. No refinancing deal - no leverage (apart from a small revolving credit facility) - forced sales of bonds into a weak market - a further haircut.

I have been buying - based on the balance of probability that should the refinancing take place, significant value will be restored to the MFNHA.ASX.

The assessment is based on the observation that bond defaults have NOT occurred. The losses in the fund is the "haircut" taken by the forced sale of good bonds into a bad market. If the refinancing deal occurs - taking a leveraged position on high quality corporate bonds is about exactly what I would be doing given the Fed pumping hundreds of billion$ into US credit markets.

There we have it - balls of steel!

winner69
16-03-2008, 11:08 AM
Good stuff Enumerate -- one needs to go seeking opportunities in the not so boring bond market as well.

It is interesting that the real yields for Us Treasuries have become negative (at leat the short term ones) . It seems highly unlikely that inflation over the next couple of years is going to be less than the current 2% yield of the two-year note.

In saying that the junk-Treasury spread, depending on how you measure it, is now north of 700 basis points. Because hedgefunds have forced selling even the yields on municipal bonds are now several dozen basis points above that of Treasuries .... almost unheard off and there doesn't seem to be local government distress at the moment (no wonder Pimco is buying these up big time).

The S&P500 dividend yield is currently 2.4% so stocks in the US are priced for a long term real return of about 3.5 percent.

This does seem to suggest that the debt markets in the US are so out of whack that we are now at a point where credit risk is being rewarded more than equity risk, something that should really never happen. This cannot last for very long: either spreads will tighten rapidly, equity prices will fall rapidly, or both ...... or to fix it all up an unlikely event that earnings will grow more rapidly.

As you point out it is unlikely there will be a mass default on the underlying bonds and because of the selling there a many seriiously written down things around. If one is willing to wait for underlying bonds to reach maturity I'm sure that one will be well rewarded.

Like you mate having a dabble but should start to find some 'good' bond managers in the US to do this more seriously

Enumerate
17-03-2008, 09:02 AM
Winner69,



This does seem to suggest that the debt markets in the US are so out of whack that we are now at a point where credit risk is being rewarded more than equity risk, something that should really never happen. This cannot last for very long: either spreads will tighten rapidly, equity prices will fall rapidly, or both ...... or to fix it all up an unlikely event that earnings will grow more rapidly.


Your observation is exactly right.

I am reminded of the '91 Savings&Loan crisis - war in Iraq/Kuwait, high oil prices, large federal deficit ... this time, we have seen the sub-prime melt down flow on into muni and corporate credit. I suppose it is a mix of '91 with a bit of Enron (a crisis in confidence over debt rating, this time).

I would love to hear if you uncover any good US bond prospects. (I like the T-Rowe Price PRPIX fund - but I haven't really done much scouting for opportunities).

http://finance.google.com/finance?client=ob&q=PRPIX

Wrt MFNHA.ASX, the leverage ratio has been scaled back. I think they have about $225million in borrowings with the total fund worth $314million (face) or $272million (market). This makes the leverage about 2.5x on face, 4.5x on market.

It is useful to note that the capital adequacy ratio of a bank is typically 8% - 12.5x leverage. There would be a fair amount of ANZAC "sub prime" in this lending - 110% mortgages to "investors". US Senior loans are looking alot more credit worthy.

Of course, refinancing the leverage facility is critical. If this goes to plan, there may be the opportunity to re-inflate the MNFHA.ASX portfolio by taking the leverage position back to the 6 x level. You can even buy investment grade bonds, now, at yeilds better than some senior loans.

I think buying MFNHA.ASX at about AUD$0.07 to 0.10 is about liquidation value. (This is a bit difficult to estimate - we do not know exactly what loans are left, what maturity spread; the Aussie fund has been buying back trust notes and the exact number issued will have to wait for the next report).

Steve
18-03-2008, 07:35 PM
Good analysis guys. I have also been tossing up whether to take a longer term speculative punt on something such as these. Have had a bit of luck previously when sticking my neck out into distressed debt securities.

Enumerate
19-03-2008, 07:32 AM
Steve, be a bit careful ... the risk of a further "haircut" is still very real.

The Fed reduction of .75% should flow on to a LIBOR reduction. However, as Winner69 points out, the margin above LIBOR, for commercial paper, is expanding. This puts some very real questions on the ability to refinance the leverage side of the portfolio in April. At the very least - the profit margin over the leveraged funds may be eroded (as the most probable outcome). [Remember, Senior loans are typically floating rate - margin over LIBOR. The leverage model works because the fund puts together a bundle of loans, some extra capital, and issues upstream commercial paper at a rating higher (and hence a lower interest rate) than any of the individual loans would merit].

If the leverage money cannot be obtained at an appropriate rate - I would expect a type of "bridging" model - loans to cover the existing debt to run to maturity ... they maybe re-inflate the portfolio later, or wind it up, early. I am not sure what the governance constraints on the portfolio managers are.

The risks are still real and tangible.

Dubdee
19-03-2008, 09:11 AM
PNZFA and PNZFB are now both in coma.

No further coupons $1.00 back on maturity (5 or 6 years). pricing reflects zero coupon status

Enumerate
19-03-2008, 01:19 PM
However, there is a massive difference between Absolute Capital as a risky hedge fund playing a the worst end of the CDO market and Macquarie Fortress playing in the US Senior loan market.

They are both leveraged plays (MFNHA, even more than the PINS funds).

However, MFNHA has leverged Senior Loans vs direct exposure to sub-prime debts. In fact, oddly, I'd rather have MFNHA than a PINS capital guarantee.

(After all Absolute fell over at the height of the sub-prime troubles; MFNHA has the magical "Macquarie" label - if a Lazarus act is possible - having the "M" word on your label will help with the probabilities).

Let me see ... we have had the witchhunt (spill over from sub-prime into corp/muni bond market) ... we have had the punishment of the innocent (Bear Stearns collapse) ... all we need is for the angry mob to disperse (restoration of liquidity into the bond markets ... que the Fed) ... and we might see a return to the bond markets as the place to be when equities look a bit shakey (rally in bonds).

Snapper
22-03-2008, 11:54 AM
http://biz.yahoo.com/ap/080321/state_pensions_mortgages.html

Pension Plans Take Chance on Mortgages
Friday March 21, 11:15 am ET
By Jim Davenport, Associated Press Writer
Some State Pension Plans Seek Returns in Out-Of-Favor Mortgage Market


COLUMBIA, S.C. (AP) -- The subprime mortgage crisis has yielded at least one benefit for states: Mortgage-related investments have become so cheap that they are luring some pension funds to buy.
Retirement systems in South Carolina and Pennsylvania are nibbling at the securities, betting that they have been beaten down so much that the ones with good credit ratings could yield strong returns later.

ADVERTISEMENT


South Carolina is looking to buy $100 million of mortgage-related investments for its $30 billion state pension fund. Pennsylvania, which made money off those securities' troubles in its hedge funds last year, is also betting that they can offer long-term returns.

But the buying this time is very tentative, and may not presage a broader turnaround in these securities.

For South Carolina, the caution means buying into a managed fund. In Pennsylvania, the outside managers the fund hires are looking for bargains. But in both cases, the states emphasize they're only investing small amounts of their overall portfolios.

The bargains are the product of a crisis in the mortgage industry brought on by some lenders taking greater risks by lending to some people who had poor credit histories. The bet was that home values would continue to rise and that these borrowers would be able to refinance before their monthly payments moved higher.

That didn't happen. Home prices fell, the rates on adjustable-rate mortgages ratcheted higher, people began defaulting on their loans, and securities tied to mortgages plummeted in value.

Now, some see bargains as investors realize the underlying assets the securities represent are far from worthless.

"Some of the securities that have dropped in value were really very solid securities," said Robert Gentzel, a spokesman for the Pennsylvania State Employees' Retirement System.

"This really has no bearing to the fair market value of these assets anymore," agreed Bob Borden, who oversees South Carolina's pension investment decisions. South Carolina has only put $8 million into that fund that includes some subprime mortgages, but Borden expects the rest to go in rapidly as the market swings from extreme fear toward greed.

"It has gotten to be where this market is oversold," Borden said.

While the banks and other companies that created and sold an array of mortgage-related securities need cash now, pension funds have cash -- and long-term investment views.

"They can take advantage of the fact that other parts of the market need that short-term liquidity," said Allan Emkin, managing director of Pension Consulting Alliance in Portland, Ore.

Banks, for instance, also need to comply with federal regulations that require them to have assets backing a percentage of loans on their books. "These banks are strapped for cash and they are forced sellers in the market," Borden said.

Joe LaVorgna, chief U.S. fixed income economist for Deutsche Bank Securities Inc., said for some types of mortgage investments, default rates would have to hit 90 percent at current prices for an investor to lose money.

The beating mortgage-related investments have taken is "a sign that we are dragging along or at what at least is getting close to the bottom of reality," Borden said. "That's the real question. Are we at the bottom of the market? We seem to be getting pretty awfully deep and approaching the bottom."

Nonetheless, "the bottom is hard to call," he said.

Everyone is trying to find the bottom, LaVorgna said. "I think it's possible the bottom could be a little more elusive than current prices suggest."

With banks still cleaning up their balance sheets, "there's just not a lot of risk taking at the moment," he said.

So don't expect other state-run pension plans to immediately rush back in to mortgage-related investments, said Keith Brainard, research director for the National Association of State Retirement Administrators. "It's going to be a lot more subtle in most cases."

Clark McKinley, a spokesman for the California Public Employees' Retirement System said the nation's largest public pension fund has about $2.4 billion in structured investments related to mortgages -- less than 1 percent of its $250 billion fund. But McKinley won't say whether portfolio managers are now angling for bargains on underpriced mortgage investments.

Brainard said mortgage investments are typically only slivers of any state's portfolio.

"Florida last fall came to realize it had a lot more this stuff than anybody realized," Brainard said. But Brainard puts that in context: The state really had less than 1 percent of its more than $137 billion portfolio at stake.

Small or not, a downgrade in some securities tied to mortgages in that portfolio last fall prompted some Florida local governments to pull money from the fund. That created something of a run on the fund that forced the state to shut down access in December.

Mike McCauley, a spokesman for the board overseeing Florida Retirement System investments, said he's not aware of any new emphasis being placed on the mortgage sector. The state's plan "maintains a highly diversified portfolio, including mortgage-related securities within our fixed-income and equity asset classes and we tend to be plain vanilla relative to other public pension systems."

Maryland is nosing around at the urging of its independent advisers. "There's probably a chance we're going to do something there," said John Greenberg, acting chief investment officer for the Maryland Retirement and Pension System. The state relies mostly on asset-backed mortgage investments such as real estate investment trusts. "We're not looking to invest in any mortgage-backed only fund."

REITs, which trade like stocks and are a good proxy for owning commercial and institutional real estate, took a beating last year too. "We're going to increase our position in overall real estate and since we're doing that and REITs are part of our real estate portfolio, we're definitely going to increase our position in REITS," Greenberg said. Maryland has $1.9 billion, or 5 percent, the pension's $37.5 billion in real estate now, but that will double.

Other states see opportunity beckoning, but are waiting on the sidelines.

"No decision has been made to date to make any significant purchases of mortgage-backed securities," said Chris Rackers, who manages Missouri's pension investments.

Steve
22-03-2008, 03:37 PM
It's often a sign that the worst could be over when the bargain hunters start sniffing around...

Enumerate
07-04-2008, 03:53 PM
MFNHA refinancing has occured, for the leverage money.

Looks like the units will be worth up to 83cents in five years time.

Current buying at about 25cents puts a NPV discount rate of maybe 20%, or so, tax free.

Market, therefore, seems to be factoring a huge amount of default risk into the portfolio of Senior Loans.