As new security types develop in the market, proper due diligence process continues to be an integral part of investment decisions.This advisory discusses some of the risk considerations of this new type of security which emerged in late 2009.
Given the relative minimal issuances of these securities, we are not convinced that a real secondary market for the debt exists. A strong supply and demand in the secondary market is necessary to create the kind of liquidity we want to see for investments in our client portfolios. Currently, we do not see either supply or demand. If an investor in an extendible security wants immediate liquidity, we anticipate a real potential for principal loss.
While these types of securities have mandatory tender option to the issuers, investors need the ability to hold them until the extended mandatory purchase date, which can typically go to one year.
Since these securities typically do not have external bank support agreement and rely on the issuer’s creditworthiness, dedicated expertise and resources are required to conduct ongoing due diligence on the issuer’s ability to honor the commitment.