ING to explain its 'final offer' to investors

Helen Troup, chief executive of ING New Zealand, says the waiver embedded in the offer is 'all about closure' but out-of-pocket investors are not happy. Photo / Kenny Rodger

ING will next week front up to investors in its frozen credit funds for the first time to explain the details of its latest "final"offer.

It has been a long and anxious wait for the more than 13,000 investors who have had their money locked into the Regular Income Fund (RIF) and Diversified Yield Fund (DYF) since March 2008.

The two funds, which invested in complicated credit products, were frozen after their values began to drop in the wake of the credit crisis and investors started to pull their money out in droves.

At the peak they were worth about $800 million; by the time they were frozen that had fallen to $521 million and last week ING valued them at just $143 million.

Investors who bought in at $1 a unit have seen their asset shrink to 19c for DYF and 22c for RIF.

Since the funds were frozen, ING and its 49 per cent shareholder ANZ, which sold the products to around 2700 investors, have been trying to come up with a proposal to placate investors who have become increasingly frustrated and organised.

Initially, ING offered to make a loan of $100 million to give investors back some money. But the loan would have had to be paid back before investors would see any more money.

The proposal was labelled a "disgrace" by a group of investors calling themselves the Frozen Funds Group and a group of advisers.

Late last year the Commerce Commission began to investigate the funds over potential breaches of the Fair Trading Act over the way they were marketed. There have also been a string of complaints to the Banking Ombudsman of which around 100 of the 300 made have been looked into and resolved.

In February ING came out with its first "final" offer.

Investors were to be given the option of selling their units for cash up front of 60c a unit for investors in DYF and 62c a unit for those in RIF.

Alternatively they could wait five years for a guaranteed higher rate of 83c and 86c.

Both the Frozen Fund Group and the adviser group responded by saying they would still pursue a full product recall and the repayment of all the money invested.

Last week ING announced, coincidentally on the morning of Budget day, that it had another version of the final offer.

The money remains the same but investors can now choose to take it up front or put it in an on-call savings account with the ANZ at a guaranteed interest rate of 8.3 per cent.

The only catch is if investors choose to go with the offer they must also waive their right to make a claim or take legal action against ING New Zealand, ING Group, ANZ, their directors and staff and any adviser that recommended the funds.

It is a catch that Frozen Funds investor Gerard Prinsen is labelling legal blackmail.

Prinsen and others in the group question why the waiver agreement is necessary if ING has, as it claims, done nothing wrong.

"It's just not on - they should drop the waiver - unless they have got something to hide."

ING chief executive Helen Troup, who will be fronting up in person to investors around the country, says it is a standard term and condition in most settlements and is all about gaining closure.

"We haven't come at this from a 'had to' perspective - we are looking for closure.

"Even if - and we do believe we have done everything appropriately and we refute all the allegations - but that doesn't stop people from running their own campaigns, running court cases and wasting time and resources over the next few years if they choose to. We want to give the benefit of this to all investors so we can move forward."

The waiver has also upset some advisers who say that because it includes them, it puts them in a difficult place when it comes to giving advice to their clients.

Financial adviser Michael Beuvink said advisers had essentially been told that if they did not recommend accepting the offer they could be open to legal action, putting advisers under pressure to recommend in favour of the offer.

Troup says if advisers were not included, and ANZ advisers were always going to be, there would have been more complaints.

Troup says the conflict does not mean advisers cannot give advice.

"A conflict means you need to make people aware of that - so they can take that into account when making the decision.

"It's all about disclosure."

But investors fear if they sign up to the agreement and the Commerce Commission investigation results in a court case and possible compensation, they could miss out.

The Commerce Commission says its investigation will not be completed in time for the ING offer acceptance deadline on July 13.

"The commission's advice is that investors should seek their own legal and financial advice over the merits of the current offer now."

The investor meetings start on Friday in Invercargill and Dunedin and finish in Auckland on June 18.

HOW IT WENT WRONG

The two ING funds invested in a number of different credit products but the biggest chunk of investors' money was in collateralised loan obligations (CLOs) and credit funds.

Around 50 to 65 per cent of the money was invested into these although that has since been reduced to about 33 per cent.

The CLOs and credit funds were based around corporate loans made by financial groups to companies. These were bundled into securities. The securities received interest from the companies and that money was passed on to the funds.

The CLOs only invested in senior secured loans made by companies, which meant if a company collapsed those were the first debts to be paid by a receiver or liquidator.

But the rating which determines the likelihood of a corporate being able to pay back the loan was either a B or BB - below investment grade.

As of October last year, Standard & Poor's calculated the likelihood of a BB loan defaulting or failing to be paid back at 14.65 per cent over 10 years, while the figure for B-rated loans was 44.48 per cent.

But by pooling hundreds of these loans together into a security they were able to be re-rated at a higher level because the risk was seen to be spread over a much greater range.

Different levels of return on the security were then sold to financial institutions like ING depending on the risk level they wanted to take.

ING bought into the BBB risk level below A and AA, which was still considered to be investment grade.

ING fund manager David Jansen said the risk on those securities defaulting and the fund not being paid was estimated to be just 3.5 per cent over five years in good times and at worst 5.1 per cent.

But even corporates with good loan ratings were not immune from being affected by the credit crisis.

Loans from Lehman Brothers were rated AA- before it got into trouble and it plunged to a D.

Jansen said the credit crisis essentially meant banks stopped lending and companies found it tougher to re-finance.

The corporate crisis gained steam towards the end of 2008 and company loan defaults began to accelerate.

Jansen said because of the predicted increase in corporate defaults, some institutions were now speculating defaults could go as high as 8 per cent per annum.

It was that perception that was making it hard to get a good price for the CLOs and their estimated values and that had seen the value of those in the ING funds drop from $1 to between 7c and 15c per CLO.

"It is unprecedented," Jansen said.

But other parts of the fund's investments have fared much worse.

It had some money, around 14 per cent before the credit crisis, invested in residential mortgage backed securities.

The residential mortgage securities are now worth between 0c and 3c each. Another chunk was in commercial mortgage-backed securities.

Loans over infrastructure projects and Government bonds in emerging markets like Mexico were also invested into, as well as bank securities in smaller US banks.

The investments were split geographically between the United States and Europe.

A chunk of around 10 to 15 per cent was also kept in cash to ensure people could be paid out if they exited the fund, although more than half of the funds are now in cash.

The RIF fund is now valued at 19c per unit and DYF at 22c per unit.