Generator Income Notes

Transcription

1 Generator Income Notes Generator Income Notes Dated: 2 November 2004 Issued by: Generator Investments Australia Limited ABN Lead Manager and Arranger: Macquarie Equities Limited ABN

2 Investments in Generator Income Notes are not deposits with, or other liabilities of Macquarie Bank Limited ABN ("Macquarie Bank") or any other member company of the Macquarie Bank Group, and are subject to investment risk, including possible delays in repayment and loss of income and principal invested. None of Macquarie Bank, Generator Investments Australia Limited ABN , Macquarie Equities Limited ABN or any other member company of the Macquarie Bank Group guarantees any particular rate of return or the performance of Generator Income Notes, nor do they guarantee the repayment of capital from Generator Income Notes. Important information This Prospectus is for an offer by Generator Investments Australia Limited, as trustee of the Generator Income Trust ("Generator Trust"), of Generator Income Notes. Generator Income Notes are classified as unsecured notes for the purposes of section 283BH of the Corporations Act. This Offer is only available to persons who receive this Prospectus in Australia or New Zealand. Applications from outside Australia or New Zealand will not be accepted. This Offer is only available to Australian resident investors and New Zealand resident investors. This Offer is only available to Australian resident investors through application via the Application Form included in, or accompanying this Prospectus. This Offer is only available to New Zealand resident investors through application via the Application Form included in, or accompanying the Investment Statement. This Offer does not constitute an offer in any jurisdiction in which, or to any person to whom, it would be unlawful to make such an offer. This Prospectus is dated 2 November 2004 and was lodged, on or about 2 November 2004, with the Australian Securities and Investments Commission ("ASIC"). ASIC and the Australian Stock Exchange Limited ("ASX") and their respective officers take no responsibility for this Prospectus or the merits of the investment to which this Prospectus relates. No Generator Income Notes will be issued on the basis of this Prospectus later than 13 months after the date of this Prospectus. No person is authorised to provide any information or to make any representation with respect to this Offer described in this Prospectus which is not contained in this Prospectus. Any information or representation not so contained may not be relied upon as having been authorised by Generator or the Macquarie Bank Group in connection with this Offer. Investments in Generator Income Notes are not deposits with, or other liabilities of JPMorgan Chase Bank, AXA Investment Managers, Paris S.A. ( AXA IM ) or any of their respective related parties or associates, and are subject to investment risk, including possible delays in repayment and loss of income and principal invested. Neither JPMorgan Chase Bank, AXA IM, nor any of their respective related parties or associates guarantees any particular rate of return, or the performance of Generator Income Notes, nor do they guarantee the repayment of capital from Generator Income Notes. AXA IM, as the manager for Aria, has no fiduciary responsibility to the holders of the Generator Income Notes. AXA IM has not reviewed or verified the accuracy of any statements contained in this Prospectus, particularly with regard to the description of the Aria Notes. New Zealand Generator Income Notes are offered to New Zealand investors under the Securities Act (Australian Issuers) Exemption Notice 2002 (New Zealand) which, among other things, requires certain documents in respect of Generator Income Notes to be received by the New Zealand Registrar of Companies. Copies of these documents are listed in the Investment Statement prepared in respect of the Generator Income Notes and can be inspected at the office of the New Zealand Registrar of Companies and/or from Generator. Note to applicants The Offer contained in this Prospectus does not take into account your investment objectives, financial situation or particular needs. Generator Income Notes are a complex financial product intended to provide financial returns over their term. It is important that you read this Prospectus in full, consider and understand all the risk factors that could affect the performance of Generator Income Notes in light of your own particular investment objectives, financial situation or particular needs before deciding to invest in Generator Income Notes. Income amounts payable and the amount of principal outstanding may be reduced in certain situations as set out in this Prospectus. See sections 4 and 5 for further information. You should also seek professional advice from your accountant, financial adviser, taxation adviser, solicitor or other professional adviser prior to deciding whether to invest. Rating An application has been made to Standard & Poor's ("S&P") for a rating of Generator Income Notes, which is expected to be "AAA" on repayment of principal at Maturity, in accordance with the terms and conditions of the Generator Income Notes. No rating is being sought on the payment of Income of Generator Income Notes. S&P s rating is expected to be provided on the Issue Date. This Offer is conditional on achieving a S&P s rating on the Issue Date of AAA on return of principal at Maturity, in accordance with the terms and conditions of the Generator Income Notes. S&P has not been involved in the preparation of this Prospectus and shall in no way be liable for its content. A rating by S&P is a statement of opinion and is not a recommendation to buy, hold or sell a security. A rating is based on current information furnished to S&P or obtained by S&P from sources it considers reliable. S&P does not perform an audit in connection with any rating and may, on occasion, rely on unaudited financial information. A rating may be changed, suspended, or withdrawn at any time as a result of changes in, or unavailability of, such information, or based on other circumstances. There is no rating for the payment of Income on Generator Income Notes. A failure to pay Income is not an event of default for the Generator Income Notes. Definitions A number of words and terms used in this Prospectus have defined meanings that appear in section 13, Glossary. Financial amounts All financial amounts contained in this Prospectus are expressed in Australian currency unless otherwise stated. Electronic prospectus This Prospectus may be viewed online at Persons who receive the electronic version of this Prospectus should ensure that they download and read the entire Prospectus. This Offer is only available to persons receiving the electronic version of this Prospectus within Australia or New Zealand. A paper copy of this Prospectus will be provided free of charge to any person who requests a copy by contacting the Lead Manager, during the open period of this Offer. Application for Generator Income Notes may only be made on, and will only be issued or transferred on receipt of Applications made on the Application Form attached to or accompanying this Prospectus or a paper copy of it, which can be downloaded in its entirety from Exposure period The Corporations Act prohibits the processing of Applications in the seven day period after the date of the lodgement of this Prospectus. This period may be extended by ASIC by up to a further seven days. This period is an exposure period to enable the Prospectus to be examined by market participants prior to the raising of funds. Applications received during the exposure period will not be processed until after the expiry of that period. No preference will be conferred on Applications received during the exposure period.

3 Contents Important Information 1 1. Introducing Generator Income Notes 3 2. Key features 7 3. The investment 9 4. Risks Returns AXA Investment Managers Further information about Generator Income Notes Fees and charges Technical details: trading and recovery process Technical details: description of the Aria Notes Statutory information Conditions of Generator Income Notes and material contracts Glossary How to invest 61 Application Form - Generator Income Notes Directory 70 2

4 1. Introducing Generator Income Notes Generator Income Notes combine the dual objectives of many investors - capital security and the potential for high returns - in a single defensive investment. Generator Income Notes' return is made up of: Repayment at Maturity of the initial principal invested (in accordance with the terms and conditions of the Generator Income Notes); Quarterly Income, initially at the maximum rate of 2.00% per annum above the 90 Day Bank Bill Swap Rate ("the Bank Bill Rate"), which may be reduced by Credit Events or Trading Reductions, if they occur as described in section 4; and Potential for an additional amount to be payable at Maturity as described in section 5. These returns are generated from an underlying investment in Aria Notes, which is linked to an investment programme managed by AXA Investment Managers, Paris S.A. ("AXA IM"). Aria Notes are a type of structured income investment, known as a synthetic collateralised debt obligation ("CDO"). This is not the first structured income product of its type to be launched in Australia, Generator s first offer, Generator Notes 1 is an example of a similar type - although different in some characteristics. Generator Income Notes have two key features which distinguish them from similar products: 1. Return of Principal - Approximately 68% of your original investment is invested in a structure designed to repay the entire Principal Amount at Maturity. This obligation to repay principal at Maturity (in accordance with the terms and conditions of the Generator Income Notes) is expected to be rated AAA by Standard & Poor's. This acts as a protection mechanism, reducing the risk of your initial investment amount suffering capital losses at Maturity. 2. AXA Investment Managers' role as the underlying manager - As opposed to other CDOs, the underlying investments, Aria Notes, are actively managed. AXA IM's performance in relation to the underlying Aria Notes, will be a major factor influencing the returns you receive on your Generator Income Notes. The combination of these two features with the potential for a higher yield accessible through investments in structured income products such as CDOs, may appeal to a broad range of investors. In particular, Generator Income Notes may be attractive to investors that have capital preservation as their primary objective and who are willing to take some risk on the level of income they may receive. This Prospectus outlines how this product works to combine these features and highlights the risks that you need to understand when investing in such a product. Investors should note that the Generator Income Notes are able to offer an initial yield above the Bank Bill Rate because of certain risks in the underlying structure that the Generator Income Trust has accepted. Investors should be aware that there is a risk that one or more Credit Events will occur, or that Trading Reductions will be incurred during the term and consequently that there is a risk that the yield will reduce to below the Bank Bill Rate, and possibly to zero, during the Term. If the Manager is able to outperform the credit market then the rate of Credit Events and Trading Reductions in the Reference Portfolios may be reduced relative to the credit market. However, there is no guarantee that the Manager will be able to outperform the credit market, and even if it did so, the risk of Credit Events or Trading Reductions occurring could be significant. Even in these circumstances, however, the risk of capital loss at Maturity on Generator Income Notes is very low. 1 Generator Notes were offered in April 2004 by Generator Investments Australia Limited as trustee of the Generator Australia #1 Trust. 3

5 Key dates Offer Open Date 16 November 2004 Offer Close Date 9 December 2004 Expected Allotment (Issue Date) 17 December 2004 Expected dispatch of holding statements 20 December 2004 Expected commencement of trading on ASX 24 December 2004 Date of first Income payment 8 April 2005 Maturity date 8 October 2011 Subsequent Income payments are expected to be paid quarterly within two business days of 7 January, 7 April, 7 July and 7 October in each year from 7 April 2005 to and including 8 October These dates and times are indicative only. Generator reserves the right to vary the dates and times, which includes closing the Offer early or extending it, without prior notice, and to accept late applications. Application information Application price per Generator Income Note $100 Minimum investment is $5,000 Additional investments must be in multiples of $1,000 See the Application instructions in section 14 on how to apply for Generator Income Notes. The benefits Generator Income Notes bring to your portfolio Generator Income Notes may suit investors for whom preservation of their investment principal is the number one objective and who are willing to take some risk on the level of income they may receive. Targeting regular income Generator Income Notes' Income is initially the Bank Bill Rate plus 2.00% per annum, and will be reduced by any Credit Events or Trading Reductions, if they occur, as described in section 5. The Bank Bill Rate, as at the date of this Prospectus, is approximately 5.40% per annum, so Generator Income Notes' initial Income is likely to be approximately 7.40% per annum. Under certain circumstances, this Income could be reduced to nil (see section 4). This is why Generator has introduced a manager (AXA IM) to this latest issue from Generator Investments Australia Limited - to manage the risk of Credit Events occurring and Trading Reductions being incurred. Based on AXA IM's skill and experience, Generator believes that AXA IM can reduce those risks. AXA IM's experience includes four structured credit investments that are similar in some respects to the Aria Notes which Generator will purchase, all of which are currently meeting or exceeding their target returns over a period that has included one of the worst credit markets in the past twenty years. However, AXA IM's future performance is not guaranteed. The risk of receiving lower income at some stage during the Generator Income Notes' term remains one that investors bear and that they must consider carefully. Specifically, they should consider two main scenarios in which AXA IM may not be able to prevent the Income from falling substantially: Firstly, that credit markets enter a period of significantly negative market conditions (if that happens, even if AXA IM does outperform the credit market, the Income of the Generator Income Notes may still reduce significantly); and 4

6 Secondly, that AXA IM simply does not add value, or underperforms, relative to the performance of a 'passive' or 'static' reference portfolio (that is, a reference portfolio which is not actively managed). If the Generator Income Notes were exposed to a 'static' reference portfolio which experiences historic default rates, this could result in a significant reduction or even total erosion of the Income payable in respect of the Generator Income Notes over their life. Experienced and committed management AXA IM has been appointed by Aria as Manager of the Aria Notes, the underlying investment of the Generator Income Notes. AXA IM selects and actively manages the indirect exposure to the corporate debt of two separate portfolios: The Income Portfolio with approximately 110 international companies; and The Principal Portfolio with approximately 140 international companies. The Income Portfolio and Principal Portfolio are described in further detail in section 6. AXA IM is a leader in credit management with over 60 billion under management. There is more detailed information about AXA IM in section 6 of this Prospectus. As the investment manager for the Aria Notes, AXA IM has no fiduciary responsibility to the holders of the Generator Income Notes. AXA IM has not reviewed or verified the accuracy of any statements contained in this Prospectus, particularly with regard to the description of the Aria Notes. Protection of your initial investment Under the terms of the Generator Income Notes, when held to Maturity, your initial investment in Generator Income Notes will be repaid out of the assets of the Generator Trust, which in turn will be derived from the proceeds of the Aria Notes. Standard & Poor's is expected to rate the likelihood of both the Generator Income Notes and the underlying Aria Notes returning your Principal Amount at Maturity, in accordance with the terms and conditions of the respective notes, as AAA. S&P's AAA rating is the highest credit rating given by S&P. See section 4 of this Prospectus for more detail on S&P ratings. This protection mechanism is a key feature of Generator Income Notes. Typical capital protection mechanisms in Australia and New Zealand involve a third party offering to return investors' capital at maturity, subject to certain terms and conditions. One of these conditions is that the third party itself does not default on its obligation. Unlike these previous capital protected products, Generator Income Notes is not protected by a third party such as Macquarie Bank Limited. However, because of its investment in the AAA rated Principal Investment in Aria Notes, managed by AXA IM, there is a very high likelihood that you will receive your Principal Amount at Maturity. The Principal Investment and Principal Portfolio are described over the page and in further detail in section 6. See section 4 for further detail on this protection mechanism. Expected AAA rating on the return of principal by Standard & Poor's The effect of this combination of Principal Investment and Income Investment means that Generator Income Notes are expected to be rated AAA by S&P on the repayment of principal at Maturity, (in accordance with the terms and conditions of the Generator Income Notes), but not the Income. The S&P rating is expected to be confirmed on the Issue Date. This Offer will not proceed if either Generator Income Notes or the Aria Notes fail to receive a AAA rating from S&P in relation to principal repayment. Preliminary ratings from S&P on both Generator Income Notes and Aria Notes are expected to be made available during the offer period when available and can be viewed on the Generator website, The Income of Generator Income Notes depends significantly on the performance of the Manager in relation to changing credit market conditions. Generator will not seek a rating for the Income of Generator Income Notes. Failure to pay Income on Generator Income Notes is not an event of default. 5

7 Diversification Generator Income Notes can improve the diversification of your portfolio. The underlying investments, Aria Notes, are actively managed investments referencing the debt of, in the case of the Income Portfolio, approximately 110 international companies, and in the case of the Principal Portfolio, approximately 140 international companies, meaning returns are linked to the debt of a diversified selection of international companies, possibly including a small portion of Australian companies. In this way, you can reduce the dependence of your income generating investments on the Australian economy, whilst still having some potential exposure to changes in the level of Australian interest rates. As the Generator Income Notes and the Aria Notes are payable in Australian dollars, no currency risk comes with this international diversification. This type of investment can also work to diffuse volatility in your portfolio because it can generally be expected to exhibit low correlation with other income investments such as most forms of fixed income, bonds or property. Liquidity Generator Income Notes are expected to list on the ASX on or around 24 December This may provide liquidity should you wish to exit your investment prior to Maturity. Investors should note that there can be no guarantee that an active liquid secondary market for Generator Income Notes will develop. See section 7. These investments are achieved by Aria entering into a Credit Default Swap with the Swap Counterparty as described in section 3. The Credit Default Swap is set out in the Swap Agreement and creates indirect exposure to the selection of corporate debt referenced in the Income Portfolio and Principal Portfolio. Figure 1 Highest ranked tranche (last to bear losses and receives lowest returns) Lowest ranked tranche (first to bear losses and receives highest returns) Income Portfolio Super Senior Senior Mezzanine Junior Principal Investment Income Investment Principal Portfolio 50% 50% Aria Notes Generator Income Notes Super Senior Senior Mezzanine Junior For further information on the portfolios and the relative positioning of the Income Investment and Principal Investment see sections 3 and 4. Bringing it all together The Aria Notes are the underlying investment of the Generator Trust. They aim to deliver investment protection and the potential for high income through exposure to two separately managed reference portfolios, the Principal Portfolio and the Income Portfolio. Each of those portfolios is divided into "tranches" which are portions of the portfolios distinguished by the amount of income they receive and the order in which they bear losses from the entire portfolio. The investments of the Aria Notes are: The Income Investment, which is linked to one of the highest risk, highest return tranches of the Income Portfolio; and The Principal Investment, which is linked to a lower risk, lower return tranche of the Principal Portfolio. 6

8 2. Key features Investment objective Protection mechanism Strategy The Investment Manager of the Aria Notes Income The objective of Generator Income Notes is to deliver high quarterly income payments and a return of principal at Maturity. The return of principal for Generator Income Notes will be provided through an underlying investment in Aria Notes. The protection of your investment at Maturity is not guaranteed or supported by any person, including Macquarie Bank Limited. However, Aria Notes are expected to be rated AAA by S&P in terms of return of principal at Maturity, in accordance with the terms and conditions of the Aria Notes. The expected AAA rating does not relate to the Income Investment. Generator will seek to achieve its objectives through an investment in Aria Notes which are expected to provide quarterly income and a return of principal at Maturity of the Generator Income Notes. The actual returns of the Aria Notes are determined in accordance with the terms of the Swap Agreement and are paid to Aria by the Swap Counterparty. The Swap Agreement is designed to deliver returns on the Principal Investment and the Income Investment. Each investment indirectly invests in a separate "tranche" of a portfolio of corporate debt. The Principal Investment is referenced to a portfolio of approximately 140 international companies. The Income Investment is referenced to a portfolio of approximately 110 international companies. The returns of the Aria Notes are ultimately derived from the credit performance of the corporate debt referenced in these two investments. AXA IM has been appointed to manage the credit risk of the two portfolios in order to maintain the credit rating and income level of the Aria Notes. AXA IM has been appointed, by Aria, as investment manager in relation to the Income Portfolio and the Principal Portfolio. AXA IM will manage the corporate debt referenced in both the Income Portfolio and Principal Portfolio in accordance with the terms and conditions of the Aria Notes and the Portfolio Management Agreement described in more detail in section 10. AXA IM manages four investments that are similar in some respects to the Aria Notes which Generator will purchase. To date, AXA IM has exceeded its performance targets by delivering net trading increases and protecting the capital of each investment. Generator Income Notes are expected to pay Income quarterly within two Business Days after the end of each Income Period. This Income will be determined according to the amount of income received from Generator's investment in the Aria Notes. The rate of Income Payable on the Aria Notes will initially be calculated at the Bank Bill Rate plus 2.00% per annum. This starting level of income on the Aria Notes will be reduced by Credit Events or Trading Reductions if they occur, as described in section 4. The return from Generator's investment in the Aria Notes will make up your entire return on the Generator Income Notes. Generator Income Notes are expected to receive a credit rating on the return of principal at Maturity, in accordance with the terms and conditions of the Generator Income Notes, and no rating on the Income. Income will be payable in arrears on a quarterly basis. See sections 4 & 5. See section 4. See section 3. See section 6. See section 5. 7

9 Offer amount Generator Income Notes, with an aggregate principal amount of up to $100 million, are being offered for subscription. Generator, at its discretion, may accept over-subscriptions of up to a further $100 million. See section 7. Term Quotation Fees Generator Trust Risk factors Firm allocation - Up to $100 million worth of Generator Income Notes have been reserved for subscription by the Lead Manager, stockbrokers, licensed advisers and their clients. Public pool - If Generator exercises its right to accept over-subscriptions in respect of Generator Income Notes then (to the extent that those oversubscriptions do not form part of the firm allocations) some or all of those over-subscriptions may be available for subscription by members of the public. Generator Income Notes will mature on 8 October The Principal Amount, final Income payment and any additional amount are payable by Generator on that date, unless that date is brought forward or extended as described in section 4 under the headings "Early redemption" and "Extension of term". Generator intends, within seven days after the date of this Prospectus, to apply for admission for quotation of Generator Income Notes on the ASX. If permission is not granted by the ASX for quotation of the Generator Income Notes within three months following the date of this Prospectus, Generator will be obliged to repay investors' applications in full within the time prescribed by the Corporations Act. There are no upfront fees or application fees. No brokerage is payable by any investor for Generator Income Notes under this Offer. All returns throughout this Prospectus are net of fees. The Arranger, Trustee and Manager's fees (which include a "senior", "junior" and incentive fee payable in respect of each Reference Portfolio) are set out in section 8. The Generator Trust is a unit trust ultimately owned by a charitable organisation. The Generator Trust is not a managed investment scheme and is not required to be registered under Chapter 5C of the Corporations Act. An investment in Generator Income Notes is subject to risk factors, some of which apply generally to investments and others which are specific to Generator Income Notes. See section 4. See section 7. See section 8. See section 7. See section 4. 8

10 3. The investment What are Generator Income Notes? Generator Income Notes are structured income investments which receive their return and risk from an investment in the Aria Notes. Generator will use the proceeds of issuing Generator Income Notes to purchase Aria Notes from Aria. The Aria Notes are wholesale investments, managed by AXA IM and are available only to institutional investors. What are Aria Notes? The Aria Notes are structured securities issued by Aria. Aria is a company incorporated in Ireland or Jersey, as the case may be 2, and established by JPMorgan Chase Bank. The returns on the Aria Notes are contractual in nature and are established by a set of agreements between Aria and, amongst others, the Swap Counterparty (initially JPMorgan Chase Bank). Two of the main agreements governing this arrangement are the: Swap Agreement - this provides the majority of the economic benefits and risks of the Aria Notes that are to be purchased by Generator. Portfolio Management Agreement - this establishes AXA IM as manager to select, monitor and trade the Reference Companies in the Reference Portfolios. This agreement has been specified in the programme deed for the Aria Notes and therefore is binding upon Aria and AXA IM. The Swap Agreement, amongst other Aria documents, defines the amounts of payments from each party and the circumstances in which those amounts are paid. This is different to an actual investment in securities which would yield a return; rather, it establishes the Income payable and the repayment of principal with reference to the credit performance of Reference Portfolios of Reference Companies. Accordingly the Aria Notes do not represent a claim against any of the Reference Companies. The Aria Notes are only one series of notes that may have been and may in the future be issued by Aria and other entities issuing notes out of the Aria Programme. Each series of notes issued by Aria has recourse only to the charged assets of that series (see section 10) and not to the assets of any other series. What do Aria Notes invest in? The Aria Notes take on the credit risk of Reference Companies in return for a defined level of income. The effect of the Swap Agreement is that Aria sells to the Swap Counterparty protection from Credit Events on a portfolio of Reference Companies. The Swap Counterparty will pay Aria income in return for the protection from Credit Events. Aria will hold the money raised by the Aria Notes in the Collateral Account. This is where investors' initial principal is effectively held for the Term. Money is invested in AAA rated assets, and is used to collateralise the obligations entered into under the Swap Agreement. See section 10 for further information on the Collateral Account. The Aria Notes are not direct investments in the debt of a company, but an investment, the performance of which depends on whether a Credit Event or Trading Reduction occurs. Terms such as Trading Increases, Trading Reductions and the "management" of the portfolio refer to adding or removing exposure to debt securities of companies from the Swap Agreement terms, rather than holding the physical debt of these companies. The Aria Notes will not represent a claim against any company whose debt is included in either the Principal Investment or Income Investment and, in the event of any loss, Generator will not have recourse under the Aria Notes to those companies. How are Aria Notes structured? In Generator's case, the Aria Notes will be exposed to the credit risk of Reference Companies from two separate tranches from two separate portfolios. These are: The Income Investment - which is a tranche of the Income Portfolio and is designed to deliver the Income for the entire Aria Note. The Principal Investment - which is a tranche of the Principal Portfolio and is designed to repay the Aria Note principal at Maturity. AXA IM manages the inclusion or removal of Reference Companies in each portfolio. 2 Under certain circumstances a Jersey based Aria entity may be substituted for Aria CDO I (Ireland) PLC prior to the Issue Date. 9

11 Income Portfolio The Income Portfolio references the debt of approximately 110 predominantly Investment Grade rated Reference Companies. The return and risk of this portfolio are divided into tranches, of which the Income Investment is one of the highest return, highest risk tranches. AXA IM manages this portfolio to seek to maintain the level of Income on the Aria Notes, and therefore the Generator Income Notes. Credit Events or Trading Reductions incurred in the Income Portfolio will be borne by the Income Investment first, and will affect the level of Income payable as set out in section 4. The Income Investment is shielded by an Income Buffer from Credit Events or Trading Reductions incurred by AXA IM up to 0.15% of the Income Portfolio. For further information see section 4. Net Trading Increases serve to increase the Trading Reserve, which shields the Income Investment from subsequent Credit Events and Trading Reductions in the same manner as the Income Buffer. Principal Portfolio The Principal Portfolio references the debt of approximately 140 predominantly Investment Grade rated Reference Companies. The return and risk of this portfolio are divided into tranches, of which the Principal Investment is a very low-risk tranche. The Principal Investment is shielded by a Principal Buffer from Credit Events or Trading Reductions incurred by AXA IM up to 10.3% of the Principal Portfolio. For further information see section 4. AXA IM manages this portfolio to seek to maintain the credit rating on the return of principal at Maturity. The return of principal at Maturity will be provided solely through the Principal Investment. The return of principal is not guaranteed or supported by any person, including Macquarie Bank Limited. Aria Notes are expected to be rated AAA by S&P in terms of return of principal at maturity, in accordance with the terms and conditions of the Aria Notes. The expected AAA rating does not relate to the Income Investment. The notes which Generator will purchase are part of the Aria Note programme, from which multiple series of notes have been and may, in the future, be issued. Each series of notes represents limited recourse obligations of Aria, which means that Noteholders only have recourse to the Charged Assets in respect of the Aria Notes. For further information on Aria Notes see section 10. Why is AXA IM managing the portfolios? As the Aria Notes are taking on credit risk in return for receiving income, AXA IM has been appointed to manage the credit risk to maintain the credit rating and income level of the Aria Notes. If a manager was not appointed to select, monitor and manage the Income Portfolio and Principal Portfolio, then Generator's analysis of long term S&P historical default rates suggests that the Income paid by Aria Notes and Generator Income Notes would progressively fall to zero over the term. However, there is no guarantee that the appointment of AXA IM as Manager will preclude this from happening. For further information on the returns on Generator Income Notes and AXA IM see sections 5 and 6 respectively. Figure 2 overleaf illustrates how the investment is structured. 10

12 Figure 2 Application Amount $100 Proceeds of raising $100 Obligation to make payments in relation to the portfolios $100 Income Portfolio Income Investment Investors Generator Trust (Generator Income Note Issuer) Aria Trust (Aria Note Issuer) JPMorgan Chase Bank (Swap Counterparty) Generator Income Notes Return of Principal at Maturity Income Aria Notes Return of principal at maturity Income AAA collateral $100 Income in return for taking credit risk on the portfolios Swap Agreement Portfolio Management Agreement (AXA IM) 50% Principal 50% Portfolio Principal Investment Collateral Account What are tranches? The Aria Notes' Income Investment and Principal Investment are two tranches of two larger portfolios of Reference Companies known as the Income Portfolio and Principal Portfolio. Each tranche is distinguished by the amount of income it receives and the order in which it bears any loss from the entire portfolio. As shown in figure 3, losses are borne by the lowest tranche of the portfolio first. If this first tranche is reduced to zero, then further losses are borne by progressively higher tranches. In return for taking on increased risk of loss the lower tranches receive higher income. In the case of the Aria Notes which back Generator Income Notes: The Principal Investment is a higher ranked tranche which receives lower income for taking very low risk of loss. This tranche represents approximately 68% of the Aria Notes. It pays no income but is designed to pay 100% of Noteholders' Principal Amount at Maturity. The Income Investment is one of the lowest ranked tranches receiving higher income for taking higher risk of loss. This represents approximately 32% of the Aria Notes and pays the income for the entire note. These investments are tranches of separate portfolios. These portfolios are described in section 6. The losses which are borne progressively by the lowest pieces are caused by Credit Events and Trading Reductions. A reduced level of Income or even no Income may be payable if the Income Investment is affected by Trading Reductions or Credit Events. See section 4 for more information. 11

13 Generator Income Notes classification Generator Income Notes are classified as unsecured notes for the purposes of section 283BH of the Corporations Act. The liability of Generator under Generator Income Notes is limited to the assets of the Generator Trust. Those assets will comprise Aria Notes to be issued by Aria CDO I (Ireland) PLC ("Aria") 3. Generator Income Notes are secured by a first ranking fixed and floating charge held by the Note Trustee over the assets of the Generator Trust. This will include, on their acquisition, the Aria Notes held by Generator. Noteholders are secured creditors of the Generator Trust but do not have any beneficial interest in the Generator Trust. Even though Generator Income Notes are, for the purposes of the Corporations Act, defined as unsecured notes, this does not affect the nature of the fixed and floating charge held by the Note Trustee. Figure 3 50% A higher proportion of the portfolio's income is distributed to the lower ranked tranches. Super Senior Subsequent losses exceeding the first tranche are borne by progressively higher ranked tranches. Any loss in a portfolio is borne by this tranche first. Senior Mezzanine Junior Losses are borne by the lowest tranche first. Income Investment (approx 32% of the initial investment) Principal Investment (approx 68% of the initial investment) Note: The Aria Notes reference two separate portfolios. The Income Portfolio which the Income Investment references, and the Principal Portfolio which the Principal Investment references. 3 Under certain circumstances a Jersey based Aria entity may be substituted for Aria CDO I (Ireland) PLC prior to the Issue Date. 12

14 4. Risks The principal risks of investing in Generator Income Notes are listed below. These can result in a Noteholder receiving less than, or none of, the money paid in and/or not receiving the returns outlined in section 5. Some of the following risks apply generally to any investment, while others are specific to Generator Income Notes. Noteholders will not, in any circumstance, be liable to pay more than the money originally paid to invest in the Generator Income Notes. Investors should note that the Generator Income Notes are able to offer an initial yield above the Bank Bill Rate because of certain risks in the underlying structure that the Generator Trust has accepted. Investors should be aware that there is a risk that one or more Credit Events will occur, or that Trading Reductions will be incurred during the Term and consequently that there is a risk that the yield will reduce to below the Bank Bill Rate, and possibly to zero, during the Term. If the Manager is able to outperform the credit market then the rate of Credit Events and Trading Reductions in the Reference Portfolios may be reduced relative to the credit market. However, there is no guarantee that the Manager will be able to outperform the credit market, and even if it did so, the risk of Credit Events or Trading Reductions occurring could be significant. Even in these circumstances, however, the risk of capital loss at Maturity on Generator Income Notes is very low. Manager performance The performance of the Manager in managing the Income Investment and Principal Investment is a key determinant of returns on the Aria Notes, and hence of returns to Noteholders. In particular, as described above, if the Manager does not add value or underperforms relative to the market performance of a 'passive' or 'static' reference portfolio (that is, a reference portfolio which is not actively managed), there would be an increased risk that significant reductions in Income would be caused by: the occurrence of a Credit Event; or a Trading Reduction, in the Income Investment. Aria is managed in accordance with certain guidelines described in the terms and conditions of Aria's offering circular and in the Portfolio Management Agreement. The management of the Aria Notes is influenced by external factors such as the Swap Counterparty's influence. The Swap Counterparty will determine in respect of each trade proposed by AXA IM the impact (in terms of Trading Reduction or Trading Increases) that the proposed trade will have on the Aria Notes. Such calculation will be based on the Swap Counterparty's proprietary model (which the Swap Counterparty may modify at any time without notice to the Manager) and on the Swap Counterparty's market data. Definitions Trading Reduction and Trading Increase A Trading Reduction, in relation to the Income Portfolio or Principal Portfolio, occurs when the Manager removes a Reference Company from that portfolio, or reduces its portfolio weighting, in which case there will be a reduction of (i) first, any Trading Reserve for that portfolio (see overleaf), (ii) second, the buffer for the relevant portfolio; and (iii) third, the relevant Investment. Any reduction in the Income Investment will reduce the Income payable on Generator Income Notes, possibly to zero. Conversely, a Trading Increase, in relation to the Income Portfolio or Principal Portfolio, occurs when the Manager adds a Reference Company to that portfolio, or increases its portfolio weighting. Trading Increases and Trading Reductions net out over time to produce an overall positive or negative effect on the relevant Trading Reserve, relevant buffer and/or relevant Investment. Generally speaking, replacing a Reference Company trading at a lower Credit Spread with an equally weighted company trading at a higher Credit Spread will produce a net positive effect, and vice versa. To find out more about how the trading process works, see section 9. As an example, one of the Manager's functions is to seek to protect the Income Investment and Principal Investment by making trades to avoid Credit Events. Therefore the Manager may seek to remove a Reference Company in a portfolio which it has assessed at a particular risk of experiencing a Credit Event before such a Credit Event occurs. In doing so, the Manager may incur a Trading Reduction if the Reference Company removed from the portfolio has a higher Credit Spread than a Reference Company which is subsequently added to the portfolio. 13

15 Trading Reserve Trading Increases made by the Manager, after deducting any Trading Reductions and incentive fees payable to the Manager (see section 8), form part of a Trading Reserve. Each Reference Portfolio will have a separate Trading Reserve, which will initially be 0.00%. These Trading Reserves (if any) provide additional protection for the Income Investment and the Principal Investment in that: Trading Reductions incurred in relation to the Income Portfolio will need to exhaust (i) first, any Trading Reserve for that portfolio and (ii) the Income Buffer, before the Income Investment is affected; and Trading Reductions incurred in relation to the Principal Portfolio will need to exhaust (i) first, any Trading Reserve for that portfolio and (ii) second, the Principal Buffer, before the Principal Investment is affected. Credit Event A Credit Event may occur if a Reference Company held in either or both of the Income Portfolio or the Principal Portfolio: becomes insolvent or bankrupt; fails to pay when due at least US$1 million in respect of borrowed money or such other category of obligations eg. bond or loan, as defined in the Swap Agreement; has at least US$10 million of borrowed money which it owes restructured, subject to any other applicable requirements detailed in the Swap Agreement; has one of its debt obligations involuntarily accelerated; repudiates part of its debt or becomes subject to a debt moratorium. The terms used above with respect to Credit Events are broadly descriptive only and are not a complete summary. In addition, the applicable Credit Events may differ for Reference Companies depending upon the jurisdiction of incorporation of the Reference Company. More detail regarding which Credit Events apply to each of the Reference Companies are set out in the Swap Agreement and have been agreed by the Swap Counterparty and Aria. A Credit Event is not: a fall in the share price of a Reference Company; or a change in the credit rating of a Reference Company. Although, such events may occur at the same time as, and may be related to a Credit Event. Return of Principal at Maturity The repayment of the Principal Amount of Generator Income Notes is dependent upon the repayment of principal on the Aria Notes. This is expected to be provided by the Principal Investment under the Swap Agreement. The Principal Investment and the Swap Agreement are designed to deliver 100% of the Generator Income Notes Principal Amount at Maturity in accordance with the terms and conditions of the Aria Notes. Credit Events and Trading Reductions in relation to the Principal Portfolio can affect Noteholders' repayment of principal at Maturity. Impact of reductions Credit Events and/or Trading Reductions will first exhaust any Trading Reserve. Subsequent Credit Events and/or Trading Reductions which exceed the Principal Buffer of 10.3% of the Principal Portfolio will then reduce the Principal Amount of Generator Income Notes. Assuming the Principal Portfolio has approximately 140 equally weighted Reference Companies, it would take 15 Reference Companies to default with no amounts recovered before Generator Income Notes' Principal Amount was impacted, or 19 Reference Companies if an amount of 26% 4 was recovered after each default. The Principal Investment will be 1.0% of the Principal Portfolio, therefore Credit Events and/or Trading Reductions equal to or exceeding 11.3% of the Principal Portfolio will reduce the Principal Amount to zero. Credit Events and/or Trading Reductions in the Principal Portfolio can affect the credit rating on the return of principal at Maturity for Aria Notes and Generator Income Notes. Protection mechanisms The Manager - AXA IM is appointed to monitor, select and trade (i.e. add, remove or replace) the Reference Companies of the Principal Portfolio to maintain the AAA rating on return of principal at Maturity, in accordance with the terms and conditions of the Aria Notes. The Manager earns incentive fees for making Trading Increases, which increases the Trading Reserve as described overleaf. 4 Source: Macquarie Group, 26% recovery rate based on the composition of the Principal Portfolio as at 28 October 2004 and utilising the S&P publication Criteria for Rating Synthetic CDO Transactions, September

16 Principal Buffer - Credit Events and/or Trading Reductions of up to 10.3% of the value of the Principal Portfolio will not affect Noteholders' repayment of principal at Maturity. Trading Reserve - initially zero, the Trading Reserve is added to by net Trading Increases. Any Credit Events and/or Trading Reductions will first exhaust the Trading Reserve, and subsequent Credit Events or Trading Reductions will erode the Principal Buffer. If the Credit Events and/or Trading Reductions exceed 10.3% after exhausting the Trading Reserve, then the Principal Investment will be impacted and consequently, so will the repayment of Noteholders Principal Amount at Maturity. Figure 4 Principal Portfolio Likelihood 50% Principal Investment (1.0% of the Principal Portfolio) Principal Buffer (initially 10.3% of the Principal Portfolio) Trading Reserve (initially 0.0% of the Principal Portfolio) S&P is expected to assign Generator Income Notes a credit rating of AAA on return of principal at Maturity, in accordance with the terms and conditions of the Generator Income Notes. The credit rating from S&P assesses the likelihood of Generator Income Notes delivering 100% of the Principal Amount at Maturity. The expected S&P rating relates to the return of principal at Maturity only and does not cover the Income. Generator Income Notes are not guaranteed or supported by any person, including Macquarie Bank Limited. According to S&P - "An obligation rated 'AAA' has the highest rating assigned by S&P. The obligor's capacity to meet its financial commitment on the obligation is extremely strong." See table 2 on page 21 for further detail on S&P ratings. Table 1 (below) shows the implied seven year loss rates, calculated using S&P historical cumulative seven year average default rates, of a portfolio of Reference Companies with the same mix of credit ratings and weightings as the proposed Principal Portfolio as at 28 October This analysis does not take into account geographic or industry diversification of the Reference Companies. It should also be noted that a portfolio of approximately 140 Reference Companies would be less diversified than the market as a whole and can be expected to have more variation in the default rate experienced. That is to say, the highest default rate experienced might reasonably be expected to be higher than that shown below. This is a hypothetical example based on a static group of Reference Companies and does not take into account trading by a manager as would be the case with the investment in the Aria Notes for the benefit of the Generator Income Notes. Table 1. Historical statistics Implied default rate using historical weighted average 7 year default rate between 1981 and 2003: 4.10%* Implied default rate using historical weighted average 7 year default rate for the period exhibiting the highest investment grade default rates between 1981 and 2003: 5.74%* If an assumed recovery rate of 26%* is applied then: - Historical average 7 year implied loss rate: 3.03%*, that is { 4.10% x (1-26%) }; and - Historical weighted average 7 year implied loss rate for the period exhibiting the highest investment grade default rates since 1981: 4.25%*, that is { 5.74% x (1-26%) } The Principal Buffer on Generator Income Notes is 2.4* times the highest historical implied loss rate. * Source: Macquarie Group, 26% recovery rate based on the composition of the Principal Portfolio as at 28th October, 2004 and utilising the S&P publication "Criteria for Rating Synthetic CDO Transactions", September Note: Corporate bond default rates have been used to approximate credit default swap default rates. Due to technical differences in the documents which establish the CDO the default rates may not be identical. 15