By Conrad Tan

More than half of the 4,000-odd customers who bought units in the Prudential Yield 15 and Yield 20 funds from United Overseas Bank have taken up the bank's offer to redeem the units and make them whole.

A UOB spokesman told BT the exercise cost the bank 'just over $5 million - the difference between our offer price and the price at which we sold the units in the market'.

'Approximately 55 per cent of our customers holding about 85 million units of the two products took up our offer.'

UOB sold some $150 million of the Yield 15 and Yield 20 funds (or just over half the total size of the funds at inception) to about 4,000 investors, mainly in Singapore in April and May 2005.

Other distributors of the structured investment products were HSBC, Maybank, Hong Leong Finance and Prudential Assurance Company Singapore.

The fund size at inception was $267.2 million for the Singapore-dollar Yield 15 fund and US$21.1 million for the US-dollar Yield 20 fund. Each fund paid a fixed yearly coupon: 3 per cent for Yield 15, and 4.5 per cent for Yield 20.

Last month, UOB offered to redeem the units it sold at their par value, less all yearly payouts to date - or at 88 cents for the Yield 15 fund and 82 US cents for the Yield 20 fund.

At the time, UOB said it expected to take a hit of about $10 million from the redemption offer, which ended on Nov 6.

The market value of the funds, both of which mature on June 10 next year, fell to less than half their starting price in March this year, but have since recovered most of the losses.

The latest prices on Nov 20 were 83 cents for Yield 15 and 85.8 US cents for Yield 20, compared with lows of 37.5 cents and 39.8 US cents, respectively, at end-March.

Repayment of the principal and the yearly coupon payments for both funds depend on how many defaults occur in a reference pool of 100 credit names comprising corporate and government debt issuers, as well as on associated derivative transactions.

At end-September, 14 of the 100 names had failed - 10 of them in the first six months of this year.

Recovery rates - which measure how much of the underlying debt is recovered when issuers fail - for the 10 defaults this year ranged from 3 per cent to 35 per cent.

In the worst case of zero recovery from any issuers that subsequently default, the funds can withstand another nine failures before the principal and final coupon are affected. If enough names default, the entire principal and the final coupon could be wiped out, leaving investors with only the four yearly coupon payments already received.

But in the best-case outcome - that is, neither the final coupon nor the principal is affected - investors who hold their units until maturity next June will earn an extra 15 per cent for Yield 15, or 22.5 per cent for Yield 20, compared with those who chose to take up UOB's offer.

This article was first published in The Business Times.