Tailored International Collar Facility

Macquarie's Tailored International Collars (TIC) allow your clients to protect their foreign share investments against adverse share price and foreign exchange movements for minimal or potentially zero initial cash outlay. At the same time your clients can choose to release cash from their investment to fund option exercises or other investment opportunities.

A Tailored International Collar uses options to protect foreign share investments. A “floor” is set, which is the protection level. A “cap” is also set, which fixes the level of  upside. Together a floor and a cap are known as a “collar”. Depending on where the floor and cap levels are set there may be no initial cash outlay required.

The value of your clients foreign shares can fluctuate depending on:

1. the share price performance; and
2. exchange rate fluctuations. 

A positive rise in the underlying share price may be offset by unfavourable movements in the exchange rate.

Alternatively, favourable movements in both the share price and exchange rate can leverage the returns available while conversely, unfavourable movements in both the share price and exchange rate can leverage the losses available.

	Back to top

Features and key benefits of TIC

Features

• available over a broad range of foreign listed shares in the US. Other markets are available upon request
• available for shareholdings or options worth AUD200,000 or more
• choose the level and currency of the share price protection. The currency can be in  Australian dollars or in the same currency as the share
• choose the upside cap share price target
• your clients continue to earn ordinary dividends on the shares
• when protecting in Australian dollars, your clients can also choose to protect the foreign currency risk or they can retain their foreign currency exposure
• optional loan facility available to release cash.  Funds can be borrowed in the same currency as the Option Collar which can be in AUD or in the same currency as the  shares. This means your clients can borrow funds in the same currency as their protection currency
• investment terms ranging from 3 months to 5 years are available

Key benefits

• minimal and potentially zero initial cash outlay
• protected against adverse share price movements below the floor
• receive share price growth up to the cap level
• flexibility to choose Australian or foreign currency exposure and payments
• retain all ordinary cash dividend income
• release cash from investments without selling or realising capital gains tax liability (unless the shares are sold at maturity)
• use cash for other investment opportunities
• fund the exercise of employee options without having to sell shares and then hold shares on protected basis
• potential tax deductions on loan interest paid

	Back to top

Who does it suit?

• Australian residents who have international shares which have appreciated in value and who wish to protect their value from share price and exchange rate movements
• asset rich / cash poor investors who want to release cash from their shareholding without the forced sale of shares. Your clients get the peace of mind in knowing that they have protection on the downside and continued upside to the capped level
• employees with vested company options looking to finance the exercise price and continue ownership of their shares
• employees with shares or options looking to defer capital gains tax
• shareholders with CGT liability concerns who want cash for other investment opportunities
• shareholders looking to borrow Australian dollars against their foreign shares on a protected basis

	Back to top

How the strategy works

The strategy provides the flexibility for your clients to choose:

1. a floor at which their capital is protected;
2. a cap at which all further upside is foregone; and
3.the currency in which their protection and cap level is set.

Typically the floor level is set around 80% to 100% of the current share price.
The floor and cap levels can be set as   either Australian dollars or in the same currency as the underlying share.

For example

• Alex owns a US share valued at USD50;
• the current AUD/USD exchange rate is 0.50; and
• Alex chooses a protection level at 80% and the upside cap is then set at 120%

The AUD protection level would be AUD80 (ie USD50 / 0.50 x 80%). 
The AUD cap level would be AUD120 (ie USD50 / 0.50 x 120%).

Alternatively Alex may want protection in USD terms which would be set as USD40 and upside cap at USD60.
Alex can then borrow funds but only in the currency chosen for the collar.
By selecting a floor below the current share price and foregoing some share price growth, Alex is taking sufficient risk to ensure that the initial cost is minimal to him and possibly at zero cost.

What you achieve is similar to what would be achieved by buying put options which are completely  funded by selling call options.

The table below shows the relationship between the change in cost for a change in either the floor or cap level.

	Level increase	Level decrease
Floor	Cost increase	Cost decrease
Cap	Cost increase	Cost decrease

	Back to top

The optional loan facility

The optional loan facility allows you to borrow funds up to and in the same currency as the protected value of your shares.

It has the following features:

• fixed interest rates per draw down
• interest payable annually in advance
• use it to pay for any option collar cost
• year one interest payment is netted against the loan funds released
• optional facility – draw down all, some or none of the loan
• loan currency the same as the protection currency on the option collar
• minimum loan drawdown to a value of AUD100,000

	Back to top

Employee options

The collar and loan facility can be used as an efficient and cost effective solution to fund the exercise of your clients employee options.

The loan facility can be used to exercise the options and the resulting fully paid shares can be protected using the collar strategy described above.

Macquarie will usually require at least 1-2 weeks’ notice if your clients wish to use the facility to fund the exercise of the options so that Macquarie can coordinate the option exercise with your clients company.

If your clients have made a Section 139E election on the grant of their options (ie paid tax upfront on the nominal value of the options) then they may want to hold the shares resulting from their option exercise for at least 12 months to qualify for discounted capital gains.  

This strategy allows your clients to protect the value of these shares against large adverse movements on the downside whilst still maintaining potential for further upside gains over 12 months or longer.  

	Back to top

What happens at maturity?

The table shows the alternative pay offs at maturity depending on the closing share price and whether or not your clients would like to retain ownership of the shares.

Note that where the exchange rate is fixed, then the shares must be given up at maturity.

	Back to top

Product Disclosure Statement and product summary

Before investing in the Macquarie Tailored International Collar Facility, your clients must first read and understand the TIC Product Disclosure Statement.

Important: Updated financial information on Macquarie Bank Limited

	Download	Description
	Download the TIC Product Disclosure Statement  (pdf 1573KB)	TIC Product Disclosure Statement
	Download the TIC Product Summary  (pdf 50 KB)	Product Summary for TIC

	Back to top