Svensk's leveraged notes tied to ETF basket offer access to global equity with some protection

By Emma Trincal

New York, Oct. 29 - AB Svensk Exportkredit's leveraged buffered notes linked to a basket of equity exchange-traded funds may appeal to bullish investors looking for diversified global equity exposure with some protection, said Suzi Hampson, structured products analyst at Future Value Consultants.

Svensk plans to price 0% enhanced growth securities due May 5, 2014 with leveraged upside and buffered downside linked to a basket of ETFs via Wells Fargo Securities, LLC, according to a 424B2 filing with the Securities and Exchange Commission.

The basket includes the iShares MSCI EAFE index fund with a 30% weight, the iShares Russell 2000 index fund with a 30% weight, the SPDR Trust, Series 1 with a 25% weight and the iShares MSCI Emerging Market index fund with a 15% weight.

The payout at maturity will be par plus 1.25 times any increase in the basket, subject to a maximum return of 40% to 45% that will be set at pricing. Investors will receive par if the basket declines by 15% or less and will lose 1.17647% for every 1% that it declines beyond 15%.

Buffer protection

"This is capital at risk, but it's not the riskiest product. It's an alternative to investing directly in the four funds that compose the basket," Hampson said.

"These notes are for investors who are bullish on the basket of funds. They want to get worldwide equity exposure but with less risk. They're ready to see their returns capped in exchange for some downside protection."

Riskmap - a Future Value Consultants rating that measures the risk associated with a product on a zero-to-10 scale, is 4.26.

"Your only risk is when the basket declines by 15% or more. If it doesn't, you're protected," she said.

In addition, the buffer limits the losses in amount.

"If the decline is 20%, you only lose 5.88% in principal due to the downside gear. It's much better than being directly invested in the funds.

"Protection is also greater compared to a reverse convertible structure for instance where a 20% decline would make you lose the same amount since you have no buffer.

"Riskmap takes into account the amount of basket decline you need to have in order to trigger a loss. A buffer will slow down the losses."

Leverage and cap

The cap is 40% to 45% on three-and-a-half years, which is the equivalent of a 9.85% to 10.94% compounded return per year. Hampson looked at the cap in relation to the upside leverage factor of 1.25.

"The upside leverage is less than a lot of geared funds, but you probably get a higher maximum return," said Hampson.

"Usually, the less leverage you get, the higher the cap.

"Investors in these notes need to believe that the underlying basket will show solid growth. Which is why they're willing to trade a lower gear for a higher cap."

On the downside, a leverage factor of 1.17647 applies for each point that the basket declines below the buffer.

Hampson said that this feature is part of the standard leveraged buffered note structure.

"With a 10% buffer, you get a 1.1111 downside gear, which will take you down to zero. A 1.1664 [gear] will take you to zero for a 15% buffer. This factor only increases because the buffer is bigger," she said.

High return score

Future Value Consultants publishes a chart that displays probabilities of returns. The chart shows different return buckets from losses to gains and a probability is assigned for each of those.

Investors in the notes have a much greater chance of generating gains than losses - 82% versus 18%, respectively.

In addition, the probabilities for a positive outcome are heavily concentrated - a 47% probability - in the highest gain bucket of a 10% to 15% return, according to the chart.

"That's because there is a high chance of hitting the cap," said Hampson.

"We assume some underlying growth proportional to the volatility, and we also take into account the possibility of getting principal back if the [basket] finishes between 85% and 100%."

Future Value Consultants gave a 6.14 return score to the notes. The rating measures on a scale of zero to 10 the risk-adjusted return of the notes.

"The return score is reasonably high as [is] the overall rating, which suggests that the risk-adjusted return is above average," said Hampson.

Above average

The overall rating, on a scale of zero to 10, is Future Value Consultants' opinion on the quality of a deal. It takes into account the product's costs, structure and risk/return profile and represents an average of three scores weighted 40% to the value score, 40% to the return score and 20% to the simplicity score.

Simplicity, which measures on the same scale the lack of complexity of a structure, is 8.50 for the notes.

The 9.55 value score, on a scale of zero to 10, measures the real value to the investor after deducting the costs the issuer charges in fees and commissions on an annualized basis. The higher the value rating, the less the investor is giving up in terms of fees and issuers' profit margins.

"This product is pricing high and, therefore, has a high value," said Hampson.

The rating versus riskmap chart illustrates how the overall rating measures up compared to other recently rated products of a variety of structures. The chart shows an overall score situated on the top of the chart.

"It's pretty much on top with a very limited number of products above it, according to the scatter chart, so I'd say it's very good," she said.

"This is a product that reduces risk due to the buffer while still offering an opportunity for decent annualized returns."

The notes are expected to price in October and settle in November.

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