Unwinding Balthazar brings windfall to Pearl’s with-profits policyholders
London, Tuesday, April 24, 2007
Pearl Group and NewSmith Financial Solutions announce today the completion of an innovative capital markets transaction that will benefit policyholders in Pearl’s with-profits fund.
Pearl Group, acting through its newly created investment management company Axial, is continuously looking to provide greater investment returns to its policyholders. Axial identified a potential value creation opportunity in a highly complicated portfolio held within Pearl’s with-profits fund and sought to hire an external advisor to assist in releasing this value. After conducting due diligence on advisors in the market place, Axial appointed NewSmith to advise on its CDO portfolio in July, 2006.
The transaction involved the early redemption of Balthazar CSO I BV (“Balthazar”) - a complex, hybrid collateralised debt obligation (CDO) issued in January 2003, and which had been scheduled to mature in 2011. Early redemption, completed yesterday, more than doubled the realisable value for Pearl’s with-profits policyholders and other investors in the equity portion of Balthazar.
Balthazar was a synthetic issuer, which raised €180 million from investors funding a €1 billion underlying reference portfolio of mainly investment grade credit default swaps (CDS). It included four tranches of notes: €105m of Class A notes rated AAA / Aaa, €25m of Class B notes rated AA- / Aa3, €20m of Class C notes rated A- / A3, and €30m of unrated subordinated (“equity”) notes. In common with many complex securitisations, the restrictive wording of the trust deed governing the bonds, together with other factors, meant that the optimum value of the equity tranche was not reflected in prices indicated by the secondary market. Pearl held approximately 50% of the equity tranche, as well as a significant amount of the Class C notes.
Newsmith’s role in this transaction was to engineer an early redemption of the bond, thus releasing the optimal value of the equity tranche. Together with Axial, NewSmith worked with dealers to identify existing investors in Balthazar, offering them a premium for their holdings and accumulating more than 80% of outstanding bonds. This enabled them to secure the 75% majority of bondholders necessary to vote through amendments to the bond’s original trust deed. Following an extraordinary resolution and acceptance of a supplemental trust deed, the underlying CDS portfolio was unwound and the collateral securities sold. Proceeds were applied to the redemption of the outstanding notes, with equity holders (including Pearl Group) receiving all amounts remaining after the payment of the Class A, B and C Notes.
On completion of the deal, the gross consideration for the equity notes was in excess of €43.65 million, or more than 145% of nominal value, compared to less than €19 million, or just over 60% of nominal value, that had been indicated in the secondary market. For Pearl policyholders, the deal represented a windfall of approximately €12.5 million.
“This is an excellent result for Pearl’s with-profits policyholders, and a vivid illustration of how we are identifying and employing sophisticated capital markets skills and techniques to realise value on their behalf,” said John Cusins, Director of Axial Investment Management.
TJ Lim, Chief Executive Officer at NewSmith Financial Solutions, said, “We are pleased to have helped Pearl and its policy holders in overcoming the obstacles that had been preventing them from enjoying the benefits of the currently strong credit cycle.” He added, “There are many similar outstanding securitisations in today’s market, where fair value of the equity component is not reflected in the secondary market. We are continuing to see huge potential in unlocking value from similar collateralised debt obligations and other complex financing instruments held by institutional clients.”