Rolling instalments are conceptually similar to a series of consecutive ordinary instalments where you are assumed to have elected to roll from one series to the next. The objective of a rolling instalment is to maintain the level of gearing as per the disclosure document at the time of issue
Features of rolling instalments
|Underlying assets||Issued over Shares, Exchange Traded Funds, Listed Investment Companies, A-REITs and Managed Funds|
|Term to expiry||Three months to 15 years, with reset periods either 12, 18 or 24 months|
|Exercise style||American or European|
|Gearing ratio (LVR)||On issue it can range from 40% to 110%|
|Code abbreviation||6 letter code with the fourth letter being an I or J (D when in a rolling period)|
|Initial payment||Instalment price, varies depending on the level of gearing (includes a funding cost component)|
|Final instalment||Final instalment (loan amount) is optional. Adjusted at reset dates|
|Settlement||Generally Deliverable ( full ownership of underlying asset is transferred)|
|Entitlements||Entitled to all dividends and distributions including franking credits|
How rolling instalments work
Each period there is a reset date,' on which the loan amount is adjusted. The period between resets can be either 12, 18 or 24 months. On the reset date you have an opportunity to make various elections (detailed in the disclosure document).
Prior to each reset date the issuer reviews the loan amount per instalment series. Issuers generally send holders a notice specifying the new loan amount, interest and borrowing fee that are likely to apply for the next period. The notice outlines the net amount that you may need to pay to, or may receive from, the issuer.
The objective of adjusting the loan amount is to keep the level of gearing within the levels initially specified in the disclosure document. Before you buy a rolling instalment be sure to check the disclosure document for the default gearing level.
The issuer has discretion to terminate a series on the reset date. If the issuer terminates the instalment series, you can still elect to exercise the instalment on the reset date. Alternatively you can elect to receive a cash payment, which is approximately the difference between the current share price and the current loan amount.
Whether you receive, or are due to pay, a net amount to the issuer depends on the movement of the share price since the previous reset date.
Reset date 1
An instalment with a loan amount of $10.00 is about to roll over into the next period. The new loan amount indicated by the issuer has increased to $12.00, and the interest and borrowing fee component is set at $1.50. The expected payment from the issuer to you would be $0.50. This reflects the increase in the loan amount ($2.00), less the interest and fee component ($1.50).
Reset date 2
In the following period, the loan amount is reduced from $12.00 to $9.00, and the interest and borrowing fee of $1.00 is due for the next period. The expected payment from you to the issuer would be $4.00. This reflects the decrease in the loan amount ($3.00), plus the interest and fee component ($1.00).