Australia Mahogany Notes (a Credit Linked Notes)

The "Mahogany Notes" is a Lehman credit linked notes sold in Australia.
It has similar nature to the Hong Kong's Minibond.

But the information and disclosure from its Prospectus are quite different from the Minibond's Prospeucts. Here is the Mahogany Note's prospectus dated in Januay 2006. http://www.mahoganycapital.com.au/mahogany/PageAttachmentServlet?PageID=4762

同樣由雷曼亞洲一手安排的在澳洲銷售的信貸掛鈎票據 Mahogany Notes 清晰地介紹了
- 該信貸掛鈎票據之本金跟100個公司信貸掛鈎，（7個破產就會失去100％本金），
- 該票據之利息跟150個公司信貸掛鈎（破產事件跟票據利息之關係）
- 該票據所有信貸掛鈎主體之評級（AA 到 BBB- 及 低於 BBB- 之公司數目，等）和公司之業界類別等信息。
該票據明確指出其資金不是投入於任何信貸掛鈎主體（公司）。
買的人明確瞭解它們買入的產品是甚麼，所以雷曼暴煲之後，Mahogany Notes 票據持有者們沒有高呼上當，沒有投訴銷售結構。因為他們知道他們買的是甚麼。

1. The difference is in its prospeucts.
Mahogany Notes' prospectus has far more quality disclosure if comparing to Minibond's prospectus.

Here is some brief on the Mahogany Notes:

(i) Page 6 listed "TERM SUMMARY".

"Key Characteristics: Portfolio Linked Note.


Principal repayment is linked to a Capital Portfolio of 100 Investment Grade corporate entities with the required credit protection to achieve an ‘AA’ rating of Principal as at the Issue Date.


Interest is linked to an Interest Portfolio which has two components, a Return Component of 150 entitiesand a Protection Component of 50 entities. The payment of Interest is not rated.


The Notes are classified as unsecured notes for the purposes of section 283BH of the Corporations Act."


(ii). (page 8) "WHAT IS A PORTFOLIO LINKED NOTE? (PLN)":

" In traditional debt securities the repayment of principal and payment of interest is dependent upon the performanceof a single entity. A PLN has payments referenced to the performance of a number of entities (collectively called theportfolio) which may include governments and companies.


An investor in a PLN does not lend money directly or indirectly to the entities in the portfolio. An investor lends money to the issuer, and the issuer in return agrees to repay the money invested and to pay interest. The issuer typically gains exposure to the entities through derivativecontracts that reference the portfolio. In this way, investors in a PLN have interest and principal payments referenced to the performance of the portfolio entities."


(iii) (page 9) "WHAT ARE THE PORTFOLIOS?"
It listed the details of the portfolio component.


(iv) (page 9) "HOW DO THE PORTFOLIOS AFFECTTHE REPAYMENT OF THE PRINCIPAL?"

and "HOW DO THE PORTFOLIOS AFFECTTHE PAYMENT OF INTEREST?"
It explained the default event's impact to the loss of principal or interest: - The 7th default event of the 50 entities (in their capital portfolio) => 100% loss in principal;
- The Net 6th default event of the (150+50) entities (in their interest portfolio) => 100% loss in the interest payment;
The 150+50 scheme works like this: Saphir obviously sells insurance on the 150.
Thus, default event of the 150 is a negative impact (loss) on the interest payment;
Saphir obviously buys insurance on the 50. Thus, default event of the 50 is a positive impact (gain).
if 1 default from the 150 pool and 1 default from the 50 pool => net default is 0.


(v). (page 18). It stated the portfolio rating "AA", and requirements on the portfolio entities' credit rating, (on Issue Date): - "No entities in the Capital Portfolio is below 'BBB-'; - "No entities in the Return Portfolio is below 'BB-'; -- "No more than 15 entities in the Return Portfolio is below 'BBB-';

(vi). (page 22-24) It also showed the country concentration rate and industry concentration rate of each portfolio reference entities.

2. What did the Minibond Prospectus say about the reference entities included in the Minibond's collateral issued by Beryl Finance for Series #20 till #36 (excluding #24) ?
"NONE", other than it is a "AAA-rated Synthetic CDO" or "the CDO will be linked to a portfolio o finternational credits".

3. Why did SFC consider the Minibond Prospectus meetings its requirement of "Full Disclosure" (全面披露) ?
Did all the Minibond Prospectus (for all series) meet the SFC's requirements of "Clear, Accurate, Fully-Disclosure" (“清晰，准確”,“全面披露風險”)?

4. Where was Banks' due diligence to say the least?
Why did not banks request disclosure on such key information? Why did not banks mention the possible un-disclosed reference entities risk to its retail clients?

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