Deutsche links to real estate; Eksportfinans links to financials; payouts attractive but risky, adviser says

By Kenneth Lim

Boston, Oct. 23 - Issuers offered structured notes linked to highly volatile sectors Thursday, with Deutsche Bank AG tying a product to real estate and Eksportfinans ASA basing an offering on financials.

Deutsche plans to price zero-coupon capped buffered underlying securities due Nov. 12, 2010 linked to the iShares Dow Jones U.S. Real Estate Index Fund.

At maturity, if the underlying fund finishes above its initial level, investors will receive par plus double the fund return, subject to a total maximum return of 77.4% to 80%. The exact cap will be set at pricing. If the fund declines by no more than 20% below its initial level, investors receive par. Investors will lose 1% of their principal for every 1% that the fund declines by more than 20%.

Eksportfinans links to financials

Eksportfinans plans to offer zero-coupon auto-callable securities due April 2, 2011 linked to the Financial Select Sector SPDR Fund.

If the underlying fund closes above a strike level of 111% to 113% of its initial value on any of six quarterly determination dates beginning October 2009, the securities will be automatically called. The redemption amount will be 121% to 125% if called in October 2009; 126.25% to 131.25% if called in January 2010; 131.5% to 137.5% if called in April 2010; 136.75% to 143.75% if called in July 2010; 142% to 150% if called in October 2010; and 147.25% to 156.25% if called in January 2011.

If the fund finishes above the strike level at maturity, investors will receive 152.5% to 162.5% of the principal. If the notes are not called and the fund has never fallen below the trigger value of 75% of its initial value during the life of the notes, investors will receive par. Investors will lose 1% for ever 1% decline in the fund if the notes are not called and the trigger has been breached during the life of the notes.

The strike level, trigger value and redemption amounts will be set at pricing.

High potential payouts

Products linked to financials and U.S. real estate are likely to come with what will look like very attractive returns at first glance, an investment adviser said.

"The potential to get a 22.5% return in a year is very attractive right now, especially when interest rates are still low and many portfolios haven't done well," the adviser said.

But the high payouts are also linked to highly risky sectors, the adviser said.

"Honestly, I think financials is just a really, really risk space to be in at this moment," the adviser said.

"There's still a lot of uncertainty in the market, a lot of nervous investors ready to sell at the slightest scare. I mean, that's why the returns are so high on this [the Eksportfinans note] product. The volatility is much higher than the 25% buffer you're getting."

Binary play

Auto-callable structured are also binary investments, the adviser said.

"If you try to visualize your returns as a chart, you realize that with something like this you either make a lot or you lose a lot," the adviser said. "There's not really a middle ground. So the warning for investors in something like this should always be that you really have to have good research before you buy it, because there's not a lot of room for error."

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