U.K. thrift Newcastle Building Society will not hedge a first-of-a-kind hybrid bond because it has failed to raise sufficient investment to merit the cost of a derivative hedge. The retail bond, which references equity, inflation and property, has been lauded by derivative structurers for its novel combination, but Newcastle treasury officials said it has not attracted similar interest from investors on the ground, declining comment on how much was raised. One treasury official said the thrift will likely issue a second version of the bond, with a longer marketing period, and if successful this will be hedged. The official declined to speculate on hedging counterparties, or to say if the bond was structured internally or by an investment bank.
The Guaranteed Asset Allocation Bond gives investors capital-protected exposure to the FTSE 100, the Halifax House Price Index and U.K. retail price inflation. At the end of the five-year term, investors receive 110% of the rise in the basket, split between 50% exposure to the best performing asset, 30% to the second best and 20% to the worst performer. Steve Irwin, head of savings at Newcastle, did not return a message.
