Asset-backed bonds

I am not impressed by The European Life Settlement Association's (ELSA) quick reaction to the Malta Financial Services Authority's (MFSA) recent timely "Warning to prospective investors about asset-backed securities". ELSA's intervention was not entirely unexpected considering the very strong - and costly - marketing campaign undertaken by a local financial service company that launched this type of investment on the local market with a November 23 deadline.

The selling pressure reminded me of the time when Malta had no regulatory authority and the Dover Plan was heavily marketed in Malta and Gozo by a Canadian national who ended up in jail after raking in millions not only from Maltese investors but from investors from all over the world who did not see their money back. The MFSA should be lauded for taking such a courageous decision in pointing out that the characteristics of the asset-backed bonds maturing in 2014 marketed locally over the past few weeks make these unsuitable for unsophisticated investors. The MFSA was right in pointing out that it does not give investment advice but rather promotes education in financial matters. The fact that it was felt that a warning was opportune speaks for itself.

Firstly, it should be borne in mind that ELSA is not a regulator as its name might infer. Secondly, ELSA's statement included quotations from what its own members have themselves had to say elsewhere; obviously to promote its members' interests and investment products. The fact remains that asset-backed bonds are as good as their underlying assets and the smokescreen that these are none other than surrendered insurance policies makes such instruments difficult to value at any one time quite apart from the fact that there is no ready market for an investor to exit before maturity except at a price. This could be well below the amount invested as much depends on the worth of the underlying assets backing the pool of insurance policies.

Surprisingly the local advertisements highlighted insufficiently the risk aspects in investing in these bonds but only made reference to a "base prospectus" and a warning that "this investment is suitable only for investors who have knowledge and experience in financial and business matters". Yet information gleaned from ELSA's website includes a statement that "life settlements are typically used in products designed for sophisticated investors, and characterised by the use of actuarial skill to produce returns". I for one do not find such a statement at all reassuring nor enlightening and I wonder what the man in the street should be expected to make of this!

Incidentally, the website shows that ELSA, having been officially launched last May 20, is a relatively young baby. Evidently, its birth was timed to take advantage of the turmoil in global bond markets and the severe fall in interest rates on traditional bank deposits since late 2008. So one cannot blame the timing from a marketing point of view. However, only time will tell how wise local investors were in going for a foreign-based asset-backed bond maturing in 2014 yielding 7.50 per cent interest when one could invest in well-secured local corporate bonds yielding marginally less but with the advantage that the underlying assets are there for all to see and can be closely monitored.