Who provides the capital protection?

Liontamer works with a number of large international banks who provide the capital protection features for our funds as well as the formula of returns (even if there is no capital protection). The bank providing this service for each fund is often referred to as the ‘counterparty’.

Historically, the following banks have been used as counterparties to Liontamer’s funds; Barclays Bank, Deutsche Bank, KBC Bank, Morgan Stanley, and UBS.

One of the key risks that investors need to consider before investing in a capital protected fund is counterparty risk (sometimes referred to as credit risk). Counterparty risk is the possibility that the relevant bank will not be able to meet its legal obligations to deliver the investment returns or repay any protected capital at maturity i.e. the risk that the bank collapses and goes bankrupt. If a counterparty were to be made bankrupt it would be unable to repay the capital to the Liontamer fund.  For perspective, the bank owes the same legal obligations to our fund, as it does to their depositors, so when a fund has capital protection the bank providing that must repay capital regardless of market conditions.  If it defaults, it will also be defaulting on its depositors and the collapse of a bank at this level would be a very unusual and major event; however this did occur during the financial crisis of 2008 (Lehman Brothers).  Therefore counterparty risk remains a very important consideration despite tighter banking and credit regulations now being in place.

Liontamer uses banks that are experienced at structuring capital protected investment products and who have strong credit ratings issued by international ratings agencies. Credit ratings are important as these are a key indicator of the bank’s ability to meet its ongoing credit obligations. However, we also consider a number of other important factors when deciding which bank to use as the counterparty for each of our funds, including:

• Pricing competitiveness and structuring ability
• History (longevity and experience)
• Market capitalisation and level of national importance
• The regulatory strength of its home market
• Counterparty diversification across our range of funds
• Credit Default Swap spreads

Credit Default Swap (CDS) spreads are a measure of whether the market thinks a particular bank’s risk of default is increasing or decreasing. Liontamer monitors CDS spreads to assess if the default risk for a potential counterparty is changing in a worse fashion relative to other banks.

Credit ratings

As with any investment, the financial strength of the institution holding your money is very important and that’s why we have only selected leading banks with solid credit ratings to be our capital protection providers in the past. Credit ratings are provided by rating agencies which specialise in evaluating credit risk i.e. the risk that a company will default on its credit obligations.

It is important to note that credit ratings only act as a guide with which to measure and compare the counterparty’s overall capacity to meet its financial obligations, as assessed by each rating agency. Credit rating agencies undertake a lot of detailed research, but only provide an opinion of the creditworthiness of the counterparty. A high rating does not guarantee that the counterparty will not default; rather it is an assessment of the likely relative risk of credit default. For example, while a counterparty rated AAA by Standard & Poor’s might have a very small (approximately 0.09%) chance of default, the fact is that a credit default risk still exists.

There are three main credit rating agencies; Standard & Poor’s, Moody’s and Fitch. The table below shows the current credit ratings for all the counterparties used by Liontamer from each of these rating agencies. For detailed information about how each agency assess credit risk you can visit their respective websites using the links below.

Source: Standard & Poor’s and counterparty websites. Ratings shown are for long-term senior debt as at 31 September 2011.

Liontamer’s trusts are not endorsed or promoted in any way by the investment banks who act as counterparty to the trusts. They make no representation in respect of, and have no liability whatsoever to, any investor regarding the trusts or the fund’s assets, whether regarding the performance of the fund’s assets or otherwise.