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Macquarie introduces Goldman Sachs Natural Gas fund +16%
(29/5/2006)
In contrast to recent hikes in energy prices, the price of natural gas has dropped. On the back of this,
Macquarie has introduced a ‘reverse convertible’ which is written over the Goldman Sachs Natural Gas Index. This index fell substantially earlier this year due to record supplies and the price is now looking very competitive.
What is a reverse convertible?
Reverse convertibles offer a higher return to the investor than traditional bond issues of similar credit quality. They are most effective in sideways markets.
If, at maturity, the share/index is quoted above the strike price, then the investor will receive payment of 100% of the capital invested plus a coupon. If the share price is equal to or below the strike price, the return is proportional to the strike price. In any case the coupon payments will be effected.
The high coupon is a result of the reverse convertible’s structure: The premium received from the sale of the put option, together with the usual capital market interest rate results in the above-average yield.
How does the fund work?
All investors get back a 16% coupon when the fund matures in April 2007. The strike price of the option was fixed in late April 2006 at an index level of 14.73. The payout is not dependent of the upside performance but merely gas staying above 50% of 14.73 (i.e. 7.365) in order to receive the 16% coupon.
If price remains above 7.365; Macquarie returns 100% of every investor’s capital plus 16%. If the 50% barrier is touched on any day then the client receives the closing price of the index at maturity (which could be lower or could be higher) plus the coupon.
So could I lose money?
There are three possible outcomes to this investment – only one of which could result in a negative return. These are:
Scenario 1
The index remains above 7.366. In this scenario, the index price would close above 7.366 at maturity and the investor will receive back 100 of their capital plus the 16% coupon; i.e. 116%.
Scenario 2
The index touches 7.365 on one day between now and April 2007 but the index is above the strike price upon maturity. In this scenario, the investor will receive back their initial investment plus the market growth plus the 16% coupon. For example:
At maturity the index closes at 20.00. The investor will receive their capital + 100% of original investment x 20/14.73 (i.e. 35.77% of their original investment) + the 16% coupon. This results in a total return of 51.77%.
Scenario 3
The index touches 7.365 on one day between now and April 2007 but the index is below the strike price on maturity. In this scenario, the investor could lose money as they will receive back their initial investment plus the 16% coupon minus the market loss. For example:
At maturity, the index closes at 12.00. The investor will receive their capital - 100% of original investment x 12/14.73 (i.e. 18.53% of their original investment) + the 16% coupon. This results in a total return of 97.47% - a loss of 2.53%.
How do I subscribe?
A full prospectus and offer document can be requested from Candour Consultancy. Should you require further information on the fund, just click the ‘contact me’ button below, type GS NGI in the comment box and submit with your name and preferred contact details. We will then send you a more detailed fact-sheet on the fund.
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