Svensk links to currency; bailout of Fannie, Freddie could affect pricing, sector interest, distributor says

By Kenneth Lim

Boston, Sept. 9 - The bailout of Fannie Mae and Freddie Mac could have some ripple effects on the structured product market, a distributor said on a quiet Monday for the industry.

"Structured products are closely linked to many markets, so any kind of major market event will inevitably have an impact on us," a distributor said.

The week began on a quiet note, with only a few planned deals announced.

AB Svensk Exportkredit, through Deutsche Bank, plans to offer zero-coupon notes due March 2012 linked to the Deutsche Bank Balanced Currency Harvest index.

The index reflects a strategy of buying long and short three-month foreign exchange forward positions in certain foreign currencies against the U.S. dollar.

At maturity, investors will receive par plus 185% of any gain in the underlying index. Investors will lose 1% for every 1% decline in the underlying.

Fannie, Freddie weigh on minds

A distributor said the structured products industry was closely watching and reacting to the bailout of mortgage giants Fannie Mae and Freddie Mac by the government. The plan was announced over the weekend.

"This is an event that has implications on the broader market, on certain sectors and indexes and on the overall investment environment," a distributor said. "I think we're all interested in understanding those implications and figuring out how to respond."

Stocks in general rallied on Monday in response to the bailout, although the impact on certain financial names was negative.

"From an investor's standpoint, I think there are a few points," the distributor said. "First, if I already hold structured products, because of all the movement today, I'm looking at whether or not I've moved closer or further from any relevant triggers, barrier levels, buffer levels, knock-outs. I'm also going to be concerned about how this affects the credit strength of the issuer of the products I'm holding or looking at. Second, if I'm assessing products, I'm also looking at how underlying volatility has changed."

Manufacturers of structured products will be looking at similar issues.

"Issuers are looking at a lot of the same issues," the distributor said. "They're thinking about what products people will be interested in at this point and how to price them."

The distributor said the bailout would not lead to significant delays in product push-outs and pricing plans.

"I don't think that's going to be significant," the distributor said. "Volatility and market events change all the time, so this is all in a day's work. Yes, this is a major event, so I think what you might see is maybe interest shift away or towards some products and sectors, and pricing may change a little, but it's not going to slow down the pipeline."

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