Inquiry launched into Credit Sails product

A Commerce Commission inquiry is under way after tens of millions of dollars were wiped out in a complex financial product marketed to mums and dads as capital protected and AA rated.

The product, Credit Sails notes, was sold to investors in 2006 with the prospect of 8.5 per cent interest and a capital guarantee.

But after $91.5 million was raised through the offer, the price of the listed notes tanked on the NZX as the financial crisis developed and by late 2008 the notes were worthless.

A former Credit Sails investor, Robert Johnson, told BusinessDay he welcomed the move.

"I think there's a few aspects of that whole deal that would warrant a review," he said.

"A number of organisations vouched for it, with credit ratings and so on, but then when it falls over they may have been aware from the beginning there was no practical way for anyone to hold them accountable  they're too many dollars away."

Many investors who bought Credit Sails were clients of broker Forsyth Barr, which also earned commission as lead manager and underwriter of the offer.

BusinessDay understands the Commerce Commission has requested a number of documents from Forsyth Barr in relation to its inquiries.

The Commerce Commission said it did not comment on its investigations and Forsyth Barr did not return a call seeking comment.

A spokesman for the product's trustee, NZ Permanent, said: "We haven't heard anything [about an inquiry] and as far as we're aware we haven't been contacted [by the commission]."

Since Credit Sails collapsed, several concerns have emerged about how the product was structured and marketed.

At its heart, Credit Sails was an insurance deal in which Kiwi investors' money was used to insure a secret third party against losses in a corporate bond portfolio. However, it appears many investors had no idea their money was being used for insurance.

Fund manager Greg Marshall of Logic Funds in Wanaka has been campaigning for an inquiry into Credit Sails and represents 730 people who had invested about $29m in the product, "so we are very certain what the oral representations made to customers were".

"It's all about how the product was sold," he said.

"It looks to us like there are issues under the Fair Trading Act."

The deal's designer was an overseas investment bank called Calyon, a subsidiary of giant French bank Credit Agricole.

While the bond portfolio contained more than 100 blue chip companies, it also contained a handful that collapsed during the crisis.

It was their defaults that triggered the payout of the insurance and the total loss for Credit Sails investors.

Since the portfolio was deliberately designed to remain fixed for the whole six years of the product, nothing could be done to improve it once the weakening position became apparent.

Its overweight exposure to Icelandic banks and a heavily indebted directories business in America accelerated the decline, leading to suspicion of similarities between Credit Sails and Abacus, a synthetic collateralised debt obligation (CDO) brokered by Goldman Sachs and subject of a lawsuit brought against Goldman Sachs by the Securities & Exchange Commission in America.

The SEC complaint alleged Goldmans knew the CDO was designed to fail, leading to huge losses for investors on one side of the deal  and huge gains on the other.

Goldmans settled the lawsuit in July for a record US$550m (NZ$768m) without admitting liability, but accepting its marketing materials were faulty.

In July 2007, a Forsyth Barr adviser warned a client about concerns with Credit Sails "and the quality of the capital guarantee via the CDO," citing an opportunity to sell the stock in a buyback at about 93c in the dollar.

Stock exchange figures from July 2007 suggest about $10.8m worth of stock was acquired in the buyback by Calyon and a further $9m acquired by December.

BusinessDay understands many investors never learned of the buyback or of Forsyth Barr's alarm.

- © Fairfax NZ News