Capital falls over precipice

Investors in a "protected income plan" offering 10% payments until 2014, could face losing most of their savings as banking shares continue to tumble.

Blue Sky Asset Management, which opened its doors late last year as a specialist investment boutique, launched a series of bonds based on five leading bank shares including HBOS, Lloyds TSB and Royal Bank of Scotland. The 10% annual income is guaranteed, but the return of capital is not.

Structured as a "precipice bond" - complex structures which lost investors substantial sums early in this decade - the capital falls once any one of the five shares drops more than 65%, unless it at least returns to its original price before the plan matures. If that does not happen, savers lose 1% for each 1% the worst share ends up below the start price in February 2014. HBOS set out at 643p in the first bond and breached its 65% level this week. Currently, investors are looking at losses of around 75% of their capital although later issues of the bond featured shares at lower levels.

But there is some hope for savers. Because HBOS is due to disappear into LloydsTSB, the plan rules say it has to be replaced by the next biggest UK registered bank - currently Standard Chartered, which focuses on overseas banking. This will replace HBOS in the portfolio at its price on February 22.