L&G has restructured a number of its structured products backed by Irish firms to protect investors from any danger of client loss in relation to the Irish sovereign debt crisis.
"The global debt crisis, specifically the Irish debt crisis, has led to the directors of L&G making the decision to sell out of all of the Irish debt we held," Legal & General's head of commercial implementation, platforms and distribution, James Harrington told SRP. "The result of selling some of this debt early is that the capital protection on all of the plans affected has been reduced, although not the participation or minimum return."
The six products affected by L&G's decision are Accelerated Growth Investment Plan 5; Protected Capital and Growth Plan 7; Protected Capital Investment Plan; Protected Capital Investment Plan 2; Protected Capital Investment Plan 3; and Growth Investment Plan Plus 15.
All of these structures had an investment with at least one Irish financial institution including Anglo Irish Bank, Bank of Ireland, EBS Building Society and Irish Life & Permanent. Following Ireland's credit rating being reduced to below investment grade, L&G sold the investments in the bonds backing the products to mitigate the risk of client loss as a result of the Irish institutions not being able to pay at the end of the fixed term.
The capital protection of the products will now be provided primarily by UK banks (Barclays Bank, HBOS, Northern Rock, HSBC Bank, Rabobank, Alliance & Leicester, Commerzbank AG and The Royal Bank of Scotland) and building societies (Nationwide BS, Abbey National BS, Britannia BS, Nationwide BS, Chelsea BS, Portman BS, Leeds BS and Yorkshire BS).
"It is not an ideal thing to do because there is effectively a little bit of a 'haircut' on the bonds across the board, but by doing it we are reducing the risk of failure," added Harrington.
Harrington pointed that because of cost implications few providers are using multiple counterparties for their structures which has risk implications for the end investors, as the collapse of the bond provider in a single-counterparty product would mean a catastrophic failure of the product, as happened with Lehman: "While single counterparties are eminently suitable for these types of products, assessment of the counterparty is clearly important."
SRP data shows that there are only three providers in the UK market using multiple counterparties in some of the structures they are marketing, including Gilliat, which has used RBS, Barclays Bank and Morgan Stanley in its products; Aviva, which uses Abbey National, Barclays, HSBC Bank, Morgan Stanley, Royal Bank of Scotland, and UBS; and the recently launched Protean Investments, which has chosen Morgan Stanley and the UK government to collateralise its first product in the UK. Investec also uses a number of counterparties including Abbey National, HSBC Bank, Lloyds Bank International, Nationwide, and RBS to collateralise its own debt.