Macquarie Equity Lever

Transcription

1 Important Dates Opened 26 March 2008 Maturity Key Information Type Issuer Security Trustee Underlying Securities Liquidity Minimum Fees & Commissions Interest Rate Issuance Fee - Brokerage Adviser Brokerage Break Costs 10 years from the issue date of the instalment receipt, although the PDS allows for other dates. Unlisted, limited recourse facility providing leveraged exposure to a menu of ASX listed shares, exchange traded funds (ETFs) and listed investment companies (LICs). Investors acquire an instalment receipt over each Underlying Security. Macquarie Bank Limited (Macquarie). Bond Street Custodians Ltd, a nominee company appointed by Macquarie under the terms of the Instalment Receipts Deed. A menu of ASX listed shares, ETFs and LICs. Early redemption is available, although break costs may be payable for fixed interest rate facilities. Minimum initial investment of $20,000. No minimum for subsequent investments. will be paid to the outstanding instalment balance as a default. Where the current facility LVR is below 40%, investors can elect to receive the dividends. Interest amounts are capitalised into the outstanding instalment balance. Interest rates can be fixed (capitalised annually in advance) or variable (capitalised monthly in arrears). The standard variable rate as at June 2009 was 8.65% pa. Current interest rates are outlined at: The greater of 0.20% of the purchase or sale price of the Underlying Securities and $50. Up to 3.3% of the Underlying Security value bought or sold. This fee is negotiated with the adviser. Macquarie may also pay advisers a trail commission of 0.55% pa. This may be dialled up a further 0.55% pa and will be reflected in the interest rate. Break costs are payable for fixed interest rate facilities only. What this Rating Means An Approved rating means the facility provides an adequate means for investors to gain exposure to the underlying investments Scope of this Rating This rating is based on the structure of the Macquarie Equity Lever, not an assessment of the appropriateness of the menu of Underlying Securities. In addition, the rating does not consider the individual taxation position of investors, either individual or superannuation funds. Lonsec Opinion of this Facility Macquarie Equity Lever is an unlisted, limited recourse facility that provides investors with leveraged exposure to a menu of over 100 ASX listed shares, exchange traded funds and listed investment companies. Instalment receipts are issued by Macquarie Bank Limited for each Underlying Security selected by investors. The instalment receipts incorporate features of both traditional instalments and margin loans. Macquarie Equity Lever is intended to provide investors with the opportunity to invest in a portfolio of instalment receipts. The main determinant of an investor s returns is the performance of the Underlying Securities selected by investors from the menu of approved securities. These are listed at lever. Lonsec considers the facility to be a transparent and effective method to leverage the purchase of the Underlying Securities. Macquarie Equity Lever has advantages over more traditional forms of leverage such as margin loans as there is no obligation to pay the outstanding instalment balance at maturity. The Issuer, Macquarie Bank Limited, has considerable experience with products providing leveraged exposure to Underlying Securities. In Lonsec s opinion the facility is quite innovative, offering investors a limited recourse facility at an effective interest rate in line with traditional margin loans and in some cases significantly less than self funding instalments and protected equity loans. Investors should note that unlike self funding instalments and protected equity loans, Macquarie Equity Lever effectively incorporates a form of margin call. Investors receive instalment receipts over each Underlying Security by paying a First Instalment. This currently equates to 50% of the purchase price for all of the Underlying Securities on the menu of approved securities, although Macquarie may change this at any WE STRONGLY RECOMMEND THAT POTENTIAL INVESTORS READ THE PRODUCT DISCLOSURE STATEMENT 1 Lonsec Limited ABN AFSL No Participant of ASX Group

2 time. Interest on the outstanding instalment balance is capitalised, with any dividends from the Underlying Securities decreasing the outstanding instalment balance, whilst the facility LVR remains over 40%. The leverage provided in the facility is non recourse, meaning an investor s liability to Macquarie is limited to proceeds from the sale of the instalment receipts. This means Macquarie assumes a greater level of risk than a traditional margin loan. In order to keep the interest rate on the facility competitive, Macquarie Equity Lever is intended to provide investors with the opportunity to invest in a portfolio of instalment receipts, which is a prudent risk management technique for any form of investment. As such, Macquarie may impose certain restrictions to ensure sufficient diversity of an investor s portfolio. Using this Facility This is General Advice only and should be read in conjunction with the Disclaimer, Disclosure and Warning on the final page. Investors are advised to read the Product Disclosure Statement prior to making any investment decision. Macquarie Equity Lever provides investors with the opportunity to gain leveraged exposure to Underlying Securities. A menu of ASX listed shares, ETFs and LICs is available, having been selected by Macquarie based on advisor interest, dividend yield, and liquidity. The facility combines leverage, with benefits of full exposure to capital gains, dividends and franking credits (where applicable). The facility should only be used for growth and high growth risk profile investors as defined in the Lonsec Risk Profile Review. Investor Suitability Investors seeking long-term leveraged exposure to ASX listed shares, ETFs and listed investment companies. Investors seeking capital growth over the long term, with the possibility of dividends. Investors should be comfortable with the potential for high volatility in the market value of their investment. Amendments to the Superannuation Industry (Supervision) Act (SIS Act) were made in 2007 to allow SMSFs to invest in instalment warrants with specific characteristics. Macquarie Equity Lever is not intended to comply with the terms of these amendments as it does not involve a borrowing. The PDS states that the product is suitable for SMSFs on the basis of this. Further information can be found in Section 8 of the PDS. How Does the Facility Work? Macquarie Equity Lever is a facility allowing investors to purchase Underlying Securities from Macquarie and pay the purchase price in two instalments. Macquarie issues a single instalment receipt to investors each time they purchase an Underlying Security. Investors hold a Beneficial Interest in the Underlying Security by acquiring the instalment receipt but do not have any voting rights. During the term of the instalment receipt the Underlying Security is held in trust for investors by the Security Trustee, subject to a security interest in favour of Macquarie. Investors pay the First Instalment but are exposed to 100% of the price movement of the Underlying Securities, dividends and franking credits (where applicable). The amount of the First Instalment is determined by the leverage to value ratios (LVRs) of the Underlying Securities. These can be adjusted by Macquarie but will generally be 50%. In other words, for an instalment receipt issued over BHP with a face value of $100,000, an investor will pay a First Instalment of $50,000. Investors then incur interest on the outstanding part of the purchase price or the Final Instalment, which is due at maturity in 10 years. The interest amounts payable on this amount capitalises and the total amount is referred to as the outstanding instalment balance. All of the instalment receipts are consolidated under the Facility for the purpose of managing leverage across a portfolio of instalment receipts. Over time the LVR of an investor s portfolio of Underlying Securities (Current Facility LVR) will vary with changes in the market price of the Underlying Securities and total outstanding instalment balance. There is also a Maximum Facility LVR, which is currently 65%. Instalment Acceleration Event Where the Current Facility LVR exceeds or, in Macquarie s opinion, is likely to exceed the Maximum Facility LVR, an early payment request will be made to investors. This is referred to in the PDS as an Instalment Acceleration Event and is similar in nature to a margin call on a margin loan. If this occurs an investor must reduce their Current Facility LVR to at least 5% below the Maximum Facility LVR by 2pm on the business day after the request. Investors have three options where an Instalment Acceleration Event occurs: Make a cash payment, Request early closure of some or all of their instalment receipts, or Do nothing. If the Current Facility LVR is not reduced as outlined, Macquarie is able to exercise its security interest and sell some or all of the Underlying Securities. Macquarie is not obliged to dispose of the Underlying Securities at a particular value or time and will determine at its discretion which Underlying Securities to sell in order to reduce the Current Facility LVR. Lonsec Limited ABN AFSL No Participant of ASX Group 2

3 The table below shows how far the market value of a portfolio of instalment receipts must fall in order to cause an Instalment Acceleration Event: Current Facility LVR Fall in market value 50% 23% 45% 31% 40% 38% 35% 46% Source: Macquarie Property Lever PDS This table assumes the LVRs for all of the Underlying Securities are 50% and the Maximum Facility LVR is 65%. In this example, where the Current Facility LVR is 45%, the market value of the portfolio of Underlying Securities would have to fall by 31% to cause an Instalment Acceleration Event. Investors are entitled to the full benefit of ordinary dividends as well as any related franking credits (subject to eligibility and any deduction for tax). Ordinary dividends will generally be used to reduce the outstanding instalment balance on the corresponding instalment receipt. Special dividends will always be used to reduce the outstanding instalment balance on the corresponding instalment receipt. Where the Current Facility LVR is below 40%, investors may elect to receive ordinary dividends directly. Interest Rate Interest rates can either be: Variable rate with interest capitalised monthly in arrears, or Fixed rate with interest capitalised annually in advance. In calculating the annual interest amount, Macquarie includes the interest charged on the interest which is payable on the outstanding instalment balance prior to the annual interest amount being capitalised to it. Interest is payable for the full term of the instalment receipt unless investors choose to close the facility early. Stock Lending Macquarie Equity Lever incorporates a stock lending arrangement where investors may select in the application form to lend their Underlying Securities to Macquarie and receive additional income in the range of 0.05% to 0.20% pa. Investors concerned about the current disputes over stock lending arrangements currently playing out in the courts are advised not to elect to participate in this option. Lonsec is not suggesting the stock lending arrangements in this facility are in any way related to those of other brokers currently in dispute. Outstanding Instalment Balance & Maturity An investor must pay the outstanding instalment balance by the maturity date. When this occurs legal title passes from the Security Trustee to the investor. If an investor does not pay the outstanding instalment balance Macquarie may direct the Security Trustee to sell all or part of the Underlying Securities. If the proceeds from the sale are insufficient to satisfy any outstanding amounts on the instalment receipts the limited recourse nature of the leverage means Macquarie cannot seek further payment from investors. The same applies where an investor does not pay an amount owing due to an Instalment Acceleration Event. The following table shows the value of a First Instalment of $100,000 (total portfolio value of instalment receipts of $200,000) at maturity in 10 years. The table is only intended to provide a guide, assumes an interest rate of 10.70%pa and takes no account of tax, franking credits or fees. Dividend Yield %pa Underlying Security Return %pa -5% 3% 7% 10% 0% $0* $0* $117,069 $242,387 1% $0* $32,106 $156,753 $282,071 2% $0* $68,436 $193,083 $318,401 3% $0* $101,659 $226,306 $351,624 4% $0* $132,003 $256,650 $381,968 5% $10,649 $159,685 $284,332 $409,650 6% $35,871 $184,907 $309,554 $434,872 * Under these scenarios, the outstanding instalment balance would be greater than the value of the underlying shares. Source: Lonsec Differences to Margin Loans Some of the key differences of Macquarie Equity Lever to margin loans are: Interest is capitalised and dividends from the Underlying Securities are used to reduce the outstanding instalment balance. Investors can only elect to receive dividends where the Current Facility LVR is below 40%. Limited recourse leverage - At maturity there is no obligation on the investor to pay the outstanding instalment balance (see Outstanding Instalment Balance ). Eligible for SMSFs. Lonsec Limited ABN AFSL No Participant of ASX Group 3

4 A brief summary of the difference between Macquarie Equity Lever and other products providing leveraged exposure to Underlying Securities follows: Feature Macquarie Equity Lever Self Funding Instalments Margin Loans Recourse Limited Recourse Limited Recourse Full Recourse Interest Rate Same for all Underlying Securities Varies according to volatility of Underlying Security Same for each Underlying Security LVRs 50% for all Underlying Securities, however may differ 40% to 60% depending on volatility of Underlying Security 30% to 75% depending on Underlying Security Reduces outstanding instalment balance while Current Facility LVR is over 40% Reduces outstanding instalment balance Paid to investors Underlying Securities ASX 100 plus some ETFs and LICs Usually limited to ASX 50 to 100 Broader selection available, depending on provider Risks An investment in the Macquarie Equity Lever carries a number of standard investment risks associated with investment markets. These include performance, leverage, counterparty, dividend and tax risks. These and other risks are outlined in Section 4 of the PDS and should be read in full and understood by potential investors. Lonsec considers the following to be the major risks: Underlying Security risk The performance of the underlying share is the key component of an investor s returns. It is possible a fall in the market value of the Underlying Securities may lead to an additional amount being required from investors prior to maturity or the termination of an investment where the additional amount is not paid. Counterparty risk The value of instalment receipts depends on the ability of Macquarie to fulfil its obligations under the Instalment Receipts Deed. These obligations are not deposit liabilities of Macquarie and constitute unsecured contractual obligations that rank equally with other unsecured contractual obligations. Leverage risk Investors should be aware that Macquarie Equity Lever involves leverage as a result of the deferral of the payment of the outstanding instalment balance. It is important for investors to realise that when compared to a direct investment in the Underlying Securities, gains and losses are magnified through this leverage. Dividend risk This facility is structured so that dividends received from the Underlying Securities offset part or all of the interest amounts payable on the leverage. There is a risk that dividends may not be paid in the future by the Underlying Securities, resulting in higher amounts capitalising into the outstanding instalment balance. Exercise of discretion by Macquarie Macquarie is able to make an early payment request for the outstanding instalment balance in some circumstances, including when a buy-back, takeover or withdrawal offer is made for an Underlying Security, or Macquarie is unable to properly hedge its obligations in regard to the instalment receipts. Macquarie may also choose to change the LVR relating to any Underlying Security or remove any Underlying Security from the approved list. Interest Rate risk Variable rate facilities accrue interest based on a floating rate of interest. There is a risk that rates will rise above current levels, increasing interest amounts payable. Legislative Risk The government has recently amended the law in relation to instalment warrants. There is no guarantee that further changes will not be made in the future. Taxation dividends paid by the Underlying Securities are likely to be considered as assessable income in the year in which the dividends are paid. Franking Credits franking credits generally flow through to the investor, where applicable. Deductions interest amounts are expected to be deductible for most investors (up to the benchmark rate) where the interest is incurred for the purpose of producing assessable income. Interest in excess of the benchmark rate will generally be deemed to be the cost of capital protection and will therefore be added to the cost base of the Underlying Securities, effectively reducing future Capital Gains Tax payable by the investor. Lonsec Limited ABN AFSL No Participant of ASX Group 4

5 Capital Gains/Losses if the instalment receipts are disposed of prior to maturity, tax may be payable on the capital gain / loss accrued. Transfer transfer of Underlying Securities from the Security Trustee to the holder at maturity should generally be ignored for capital gains tax purposes. These comments constitute General Advice only and Lonsec advises potential investors to consult a taxation specialist before making a decision to invest based upon these taxation considerations. Investors should refer to Section 6 of the PDS for more information regarding the taxation of shareholders. Contact Information Further information can be found at: General number for enquiries: enquiries: equitylever@macquarie.com Website: Analyst Disclosure & Certification Analyst remuneration is not linked to the rating outcome. The Analyst(s) may hold the products(s) referred to in this document, but Lonsec considers such holdings not to be sufficiently material to compromise the rating or advice. Analyst(s) holdings may change during the life of this document. The Analyst(s) certify that the views expressed in this document accurately reflect their personal, professional opinion about the financial product(s) to which this document refers. Date Prepared: June 2009 Analyst: Michael Elsworth Release Authorised by: Grant Kennaway IMPORTANT NOTICE: The following relate to this document published by Lonsec Limited ABN ("Lonsec") and should be read before making any investment decision about the product(s). This report, dated June 2008, expires in 12 months or if there are any material changes in relation to the information contained in this report or any disclosure or offer document issued in relation to this offer. Lonsec reserves the right to change its opinion, rating and/or withdraw the report at any time on reasonable grounds Disclosure at the date of publication: Lonsec receives a fee from the fund manager for rating the product(s) using comprehensive and objective criteria. Lonsec s fee is not linked to the rating outcome. Costs incurred during the rating process of international funds, including travel and accommodation expenses, are paid for by the fund manager to enable on-site reviews. Lonsec does not hold the product(s) referred to in this document. Lonsec s representatives and/or their associates may hold the product(s) referred to in this document, but detail of these holdings are not known to the Analyst(s). Warnings: Past performance is not a reliable indicator of future performance. Any express or implied rating or advice presented in this document is limited to General Advice and based solely on consideration of the investment merits of the financial product(s) alone, without taking into account the investment objectives, financial situation and particular needs ( financial circumstances ) of any particular person. Before making an investment decision based on the rating or advice, the reader must consider whether it is personally appropriate in light of his or her financial circumstances or should seek further advice on its appropriateness. If our General Advice relates to the acquisition or possible acquisition of particular financial product(s), the reader should obtain and consider the Product Disclosure Statement for each financial product before making any decision about whether to acquire a product. Lonsec s rating process relies upon the participation of the product issuer. Should the fund manager no longer be an active participant in Lonsec s rating process, Lonsec reserves the right to withdraw the document at any time and discontinue future coverage of the Fund(s). Disclaimer: This document is for the exclusive use of the person to whom it is provided by Lonsec and must not be used or relied upon by any other person. No representation, warranty or undertaking is given or made in relation to the accuracy or completeness of the information presented in this document, which is drawn from public information not verified by Lonsec. Conclusions, ratings and advice are reasonably held at the time of completion but subject to change without notice. Lonsec assumes no obligation to update this document following publication. Except for any liability which cannot be excluded, Lonsec, its directors, employees and agents disclaim all liability for any error or inaccuracy in, or omission from, this document or any loss or damage suffered by the reader or any other person as a consequence of relying upon it. Lonsec Limited ABN AFSL No Participant of ASX Group 5