Outlook 2012: Credit fears resurface with sudden downgrade, unwinding of Eksportfinans

By Emma Trincal

New York, Dec. 30 - The credit downgrade in autumn of Eksportfinans ASA, a large third-party issuer, had a psychological impact on the U.S. structured products marketplace, reviving credit fears not seen since the collapse of Lehman Brothers in 2008, according to sources.

The Norwegian government announced in November the winding down of Eksportfinans, the country's credit institution for export financing. Moody's Investors Service downgraded the company to Ba1 from Aa3, and Standard & Poor's downgraded it to BBB+ from AA.

Resonating impact

"The downgrade will be at the forefront of investor concerns as it will be with all debt and equity instruments issued by financial institutions and corporations, both European and American," said Keith Styrcula, chairman of the Structured Products Association.

"In some cases, investors in stocks and bonds and other instruments could be adversely affected when market turbulence results in an unforeseen credit downgrade, such as Eksportfinans, or a flash bankruptcy, like MF Global for instance.

"It's too soon to tell how much impact Eksportfinans will have yet, as it's just now being felt," he continued.

"With Eksportfinans experiencing a seven-level downgrade overnight, the ratings agencies seem to have grown concerned about undisclosed risks on the balance sheets of issuers. With the contagion in certain European sovereigns still uncontained, credit concerns will be a dominant concern of investors in 2012 - whether in stocks, bonds, funds, exchange-traded funds or structured products."

Some sellsiders said that the recent headline has already put investors on alert and that more attention is paid to credit risk.

"The focus on the credit quality of the issuer has become a must for most investors," said Serge Troyanovksy, head of retail distribution, North America for structured products at BNP Paribas.

"We are seeing a significantly greater differentiation between stronger rated and lower rated issuers. Whereas in the past investors were often looking to pick up yield even at the cost of sacrificing the credit quality of an investment, we are now seeing a more conservative approach," he said.

An old truth

For others, investors who buy structured notes should remember that they invest in fixed-income securities.

"There's nothing new," said Samson Koo, head of derivative products at Advisors Asset Management.

"For structured investments, except for FDIC products, the element of credit risk is always there. It's no different than any fixed-income investment. Any investor in structured products should be aware of the risks and benefits associated with the issuer's credit, just like anything else."

However, Koo suggested that investors explore ways other than just credit ratings to assess risk.

"Investors should be mindful of the credit quality of the issuer. Credit ratings is part of the picture, but they can't completely rely on credit rating. Look at Eksportfinans. That got down seven notches in one day. Credit ratings is one way to measure risk. But it's not the only one," he said.

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