No relief for investors in Lehman-related funds

macquarie/AXA/trustee/

20 October 2008
| By By Lucinda Beaman |

Macquarie has provided an update on its Generator Income Notes, one of its portfolios affected by the Lehman Brothers collapse.

The Macquarie Generator Income Notes invests in collateralised debt obligations (CDOs) that “reference the corporate debt in 143 companies”. The Generator Income Notes had an investment weighting in Lehman of 1.5 per cent of the principal portfolio and 2 per cent of the income portfolio.

AXA Investment Managers (AXA IM) is employed by Macquarie to actively manage the income portfolio with a view to managing defaults.

“However, it is unlikely that AXA IM will be able to avoid further defaults in the current economic environment,” the Macquarie document said.

Macquarie said there is therefore a higher risk of further reductions in the income rate, “potentially to zero”, for at least the next 12 months. Macquarie said because the Generator Income Notes is a credit product, “that means that in times of credit stress, performance is likely to be adversely affected”, with credit defaults likely to be higher than usual over the next one to two years.

Meanwhile, the Alpha Managed Income Notes Series 1 investments have had their credit rating downgraded by Standard & Poor’s. While the previous credit rating was A-p/Stable N.R.i., the new rating is A-p/Watch Negative N.R.i. The downgrading in the credit rating relates to the researcher’s outlook for the repayment of principal on the Alpha Series 1 Notes.

Mahogany Capital has also had its Series 1 credit-linked notes downgraded. Lehman Brothers Special Financing — a related party of Lehman Brothers — is the portfolio counterparty of Saphir Finance, the company that issued the Saphir Notes, the authorised investments of Mahogany Capital in relation to Mahogany Notes I and II.

Mahogany Capital is now working with the Perpetual Trustee Company and Bank of New York Mellon in their respective roles as security and note trustee and trustee and custodian of the Saphir Notes to clarify the situation.

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