Decision-Day looms for the 18,000 investors in the Great Eastern (GE) Life product GreatLink Choice, (GLC) with the firm's take-the-money-and-run offer expiring on Friday.
At first glance, it looks like a no-brainer. Accept the offer and walk away with your initial stake as if you had not invested in the product.
But D-Day might be a bit more complicated than that for those who invested in the first couple of GLC tranches.
The single-premium product was sold in five tranches between 2005 and 2007, netting the insurer $594 million in premiums.
It was marketed as a safe investment with a minimum sum of $5,000 and with the principal sum targeted to be returned upon maturity. The plans have a five- or seven-year tenure, and the first two tranches would have matured in September and October next year.
It yields annual payouts of between 3.5 per cent and 4.9 per cent of the capital invested, depending on the tranche. The principal repayment on maturity and annual payouts are not guaranteed. The investors get some life cover.
But the product was belted by the economic downturn. As at the end of last month, the values of the GLC plans, which are linked to a class of complex financial instruments, had plunged by between 27 per cent and 77 per cent.
It prompted GE to offer a painless exit to customers, who have until Friday to accept the goodwill offer and redeem their plans.
Those who do so will get a sum equal to their original investment, less total payouts received.
Customers stuck with the worst-hit tranches - GLC 3, 4 and 5 - will likely jump at the offer but those who bought into the first two tranches have not had losses anywhere near as bad, so their decision is far from clear.
Take Madam Marie Ho, who invested $100,000 in GLC 1.
'I've already received three payouts and I'm not sure if I should hold on and hope to continue to receive the other two payouts.
'But if I opt for the refund now, I will lose out in not getting my five payouts, which amount to $17,500. I really cannot make up my mind,' she said.
Many have made their decision. By last Thursday, 53 per cent of policyholders in tranches GLC 1 and 2 have accepted the offer while 90 per cent of investors in GLC 3, 4 and 5 have said yes.
GE said that people who wish to reverse their decisions can do so by Friday. So there is still time to consider - and reconsider.
Here are some points to weigh up. The values of all five tranches have risen slightly since GE's redemption offer letter which used June's figures. The unit prices used below are the latest available, as at the end of last month.
GLC 1 and 2
Maturity
Launched in late 2005, GLC 1 and 2 will mature in September and October next year.
Payouts
Customers of both tranches have received three annual payouts at 3.5 per cent of capital invested, making a cumulative return of 10.5 per cent to date.
Credit rating
The initial credit rating for both tranches was AA minus, meaning the product had a very strong chance of meeting its obligations.
As at the end of last month, GLC 1 and 2 were downgraded to BBB minus, implying that adverse conditions or circumstances are more likely to lead to a weakened capacity of the provider to fulfil the payouts.
Credit events
The GLC product is designed to have a diversified portfolio of reference entities across industries and geographical regions. Each tranche can withstand losses from a certain number of credit events before the principal sum and annual payouts are affected.
Bankruptcies are among the most common credit events as in the case of the collapse of United States investment bank Lehman Brothers.
In the case of GLC 1 and 2, seven credit events have occurred and troubled entities include American firms Washington Mutual and Lear Corporation. At this point, the principal sum and annual payouts are still not affected.
In fact, from now till their maturities next year, both tranches can withstand a further 10 to 14 credit events before the principal amount and future annual payouts begin to erode.
Thereafter, a further three to five events would have to happen before the maturity sum and future annual payouts become totally depleted.
Redemption value
GE is offering to redeem GLC 1 and 2 at 89.5 cents per unit. As at the end of last month, the unit price of both tranches stood at about 73 cents. This is the latest updated value of GLC 1 and 2, and is higher than June's unit price of about 61 cents, thanks to the recent market rally.
What should you do?
Mr Albert Lam, investment director at IPP Financial Advisers, believes that the risk of holding on to GLC 1 and 2 is low as it will take something very drastic for another 10 to 14 credit events to occur in the next 13 to 14 months.
The Sunday Times calculated that if 11 credit events occur before maturity, a GLC 1 or 2 policyholder would lose about 10.6 per cent from his investment. This assumes that the product cannot recover any amount from the credit events.
Of course, the consumer may still lose his entire capital sum in a worst-case scenario where more credit events occur before maturity.
But if the product stays intact, the upside for the investor is that he stands to get back his principal sum and pocket a 17.5 per cent return from all the five payouts.
'As such, the risk of holding on to GLC 1 and 2 is relatively low. Earning 17.5 per cent from holding on for one more year is quite a good return,' said Mr Lam.
But he cautioned that the decision ultimately depends on the individual's financial circumstances and risk appetite.
'If this is your life savings, don't take the risk because you may lose everything in the worst-case scenario. But if GLC is only a fraction of your investments, it may not be a bad risk to take.'
You should take into account your GLC investment relative to your overall portfolio when considering whether to hold on or cash in.
Another factor to consider is whether you will need the money within the next 12 months. Accepting the refund means immediate access to your funds.
Those who decline the offer can take comfort that the refund was originally designed for GLC 3, 4 and 5 policyholders.
GE's redemption offer on July31 mentioned that the deal was initially meant for only these clients as their GLC values were very badly affected.
However, the insurer decided to extend the offer to policyholders of the first two tranches as well, despite their relatively higher values and credit rating.
GLC 3, 4 and 5
Maturity
Launched in late 2006 to 2007, GLC 3, 4 and 5 will mature between 2012 and 2013.
Payouts
Customers have received one to two annual payouts at returns ranging from 4 per cent to 4.9 per cent of capital invested.
Credit rating
The initial credit rating was a high AA but has since been downgraded to CCC minus, implying that the product is vulnerable to non-payment.
It means that in the event of adverse business, financial or economic conditions, the product is unlikely to have the capacity to meet its financial commitment.
Credit events
Nine to 11 credit events have occurred for GLCs 3, 4 and 5 and their troubled entities include Lehman Brothers and the mortgage giant Fannie Mae.
GLC 3 can weather 10 more credit events before the capital and future annual payouts are affected and a further five before the capital and payouts are depleted.
Tranches GLC 4 and 5 are more severely hit. GLC 4 can withstand only seven more credit events before the capital and annual payouts are affected, and a further four before they are depleted.
GLC 5 can accommodate another three to five credit events before its capital and annual payouts are affected and a further four to five before they are depleted.
Redemption value
GE is offering to redeem GLC 3, 4 and 5 at 90.2 cents, 90.8 cents and 96 cents per unit respectively. These are much higher than the unit prices of the three tranches as of last month: 35.6 cents for GLC 3 and 23.1 cents for GLC 4 and 5, respectively.
What should you do?
From a risk-to-reward perspective, Mr Lam believes that holders of GLC 3, 4 and 5 have an incentive to redeem now.
He calculated that the immediate gains to a policyholder for accepting the redemption offer over the product's current values range from 153 per cent to 316 per cent. This is because the current values have fallen greatly.
Depending on the tranche, GLC 3, 4 and 5 will mature in three to four years. This makes it possible for more credit events to occur.
With the maturity three to four years away and the global economy far from being out of the woods, the risk of more disasters triggering credit events remains fairly high and is not a far-fetched scenario.
Thus IPP's view is that these customers should go for the redemption offer now and take the opportunity to re-invest the proceeds in other assets.
