Great Eastern offers to buy back structured products at par

Source: Business Times: Published August 1, 2009

'Goodwill' gesture for GreatLink Choice investments may increase pressure on other firms By CONRAD TAN Singapore

GREAT Eastern Holdings is offering to buy back at full value $594 million worth of structured investment products that it sold to policyholders, some of which have plunged more than 80 per cent in value due to the financial crisis.

The life insurer, which is 87 per cent owned by OCBC Bank, said it expects to take a hit of about $250 million in its financial results for the third quarter.

Great Eastern offered yesterday to redeem all 594 million units of GreatLink Choice investment-linked products it has sold, at their par value of $1 each, less all yearly payouts to date.

That means policyholders who choose to redeem their units will be left with the initial sum they invested in the product, without any gains or losses on their investment, after including the payouts they have received so far.

The one-time offer will be open from Aug 3 to 28.

Great Eastern chief executive Ng Keng Hooi emphasised in a statement that it was making the offer voluntarily 'as a gesture of goodwill', and said that the offer would not apply to any of its other products.

Great Eastern did not sell any other similar structured products to its policyholders, he added. But its decision yesterday is likely to increase the pressure on other firms here that sold structured investment products which have since suffered heavy losses to make similar offers to buy back the products at their original value.

The Monetary Authority of Singapore (MAS) said in a statement that it 'welcomes efforts by financial institutions to take appropriate steps to maintain the trust and confidence of their customers based on their own commercial considerations'.

The GreatLink Choice series of products were structured with the underlying investments in collateralised debt obligations or CDOs and were sold in five tranches between September 2005 and October 2007.

Each tranche paid a fixed yearly coupon - ranging from 3.5 per cent to 4.9 per cent for the different tranches.

The stated objective of the funds set up to invest the proceeds from each tranche was to maintain the fixed yearly payment while offering '100 per cent capital protection on maturity' - which ranged from five to seven years. But neither the coupon payments nor the return of the full principal at maturity were backed by a formal guarantee.

Instead, the yearly payments and the principal protection depended on the performance of a reference pool of over 100 'credit names' comprising corporate and government debt issuers, as well as on associated derivative transactions. As more of the credit names defaulted, both the yearly payments and the principal invested could be eroded.

Investors could redeem their units early - but at the prevailing unit price, which varied with market conditions.

The latest prices available, as at the end of June, show that the market value of some of the units has dropped to less than a fifth of their starting price.

The fourth and fifth tranches - launched on Dec 31, 2006 and Oct 31, 2007, and maturing on Dec 31, 2013 and Oct 31, 2012 respectively - have suffered the worst declines in value. Their unit price at end-June was just 19.2 cents, compared to the initial price of $1.

The first two tranches sold - launched in 2005 on Sept 30 and Oct 31, and maturing on Sept 30 and Oct 31 next year - have fared better. Their unit prices were 61.1 cents and 60.9 cents respectively at the end of June, or about 40 per cent below par.

The third tranche, which was launched on Aug 31, 2006 and which matures on Aug 31, 2013, had a market value of 29.8 cents at end-June.

The latest quarterly reports of the five funds show that at least six of the names in each of their reference pools of credits have defaulted. The failed names include Lehman Brothers and Washington Mutual in the US and Icelandic banks Glitnir, Landsbanki and Kaupthing - all of which collapsed in quick succession in September and October last year.

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