DFC launches new bond

Press, 19 June 1986, Page 23

DFC launches new bond

By

SIMON LOUISSON

in Wellington

The Development Finance Corporation has launched yet another innovative bond, based on Government stock, and which could give significant tax advantages to investors. The bonds known as NZ TIGRs — Treasury Investment Growth Receipts — will be zero coupon securities. They are created by separating the interest and principal payments of Government stock which are then sold individually. More than $6O million of the NZ TIGRs will be offered to institutions and individual investors, both locally and internationally.

The advantage of having zero coupon stock means investors have the benefit of Government stock security, coupled with a high discount on the purchase price, deferred tax liability and current market interest rates. Interest is compounded, but yield can be delayed to suit the investor. The TIGR concept was launched by international finance house Merrill Lynch in 1982, and the idea has been used in Canada, Australia, the U.K. and West Germany, as well as the U.S. Merrill Lynch have acted as advisers to the DFC on this issue and will sell the bonds internationally. Investors will be able to

select the maturities available within the 10 year life of the bond. This will allow investors to plan for tax or expenditure requirements. A feature of the bonds, according to the DFC, is that the proceeds at maturity of principal TIGRs may constitute a capital gain not liable to taxation. Interest TIGRs will constitute assessable income on maturity, but investors will normally be able to claim a deduction for acquisition costs. Depending on circumstances, if the interest TIGRs are sold prior to maturity, the profit or gain on disposal may constitute a capital gain not liable to tax. DFC also intends to operate a secondary market for

TIGRs, allowing investors to sell on their securities if needed. DFC's general manager, Mr Murray Smith, said he expects large quantities of the TIGRs to go offshore, but the issue had been specifically structured to enable individual investors to participate. The DFC will receive a small margin between the Government stock and TIGR. It expects to have a number of other instruments available in the future. The yield rates on offer vary from 15 per cent for October, 1987, stock to 13.25 per cent for October, 1996, stock.; For the latter, a $268 investment compounds to $lOOO, while for the former an investment of $960 is required to yield $lOOO.