Svensk's Nasdaq 100 note hit by volatility, analyst says; Future Value sees more risky products in U.S.

By Kenneth Lim

Boston, Dec. 5 - A series of capped leveraged index return notes by AB Svensk Exportkredit would have a much less risky profile if not for the recent spike in market volatility, said structured products analyst Suzi Hampson of Future Value Consultants.

Meanwhile, U.S. structured products have gotten riskier as the year progressed, based on statistics compiled by Future Value, Hampson said.

Svensk, through Merrill Lynch & Co., plans to price zero-coupon capped leveraged index return notes due July 2010 linked to the Nasdaq 100 index.

At maturity, the payout will be par plus double any gain in the underlying index, subject to a maximum total payout of 116% to 120% of the principal. If the index declines to not less than 90% of its initial value, investors will receive par. Investors will lose 1% for every 1% that the index declines beyond 10%.

The payout cap will be set at pricing.

Issuer's credit matters

Future Value scored the product with an overall rating of 6.65 out of a maximum 10, which is slightly better than average.

The firm's ratings take into consideration the product's value, simplicity and potential returns.

"As a typical accelerated type product the product offers good upside potential while limiting the downside exposure through a buffer zone of 10% meaning that the index can finish by up to 10% below the strike level of 100% without principal loss," Future Value said in a research note. "This test is applied only at the final reading point. This investment offers potential enhanced returns on small to moderate market gains."

Part of the product's good overall score has to do with the issuer's strong credit profile, Hampson explained.

"Off the top of my head, I think Svensk has quite a low CDS level, which has a bigger effect on longer-term products," she said.

Underlying volatility hits risk score

The product was assigned a risk rating of 4.97 out of 10, with 10 being the riskiest, placing it near the middle of the spectrum in relation to other recent structured products.

But the product would have been much less risky if the volatility of the equity markets had not spiked up this year, Hampson said. The Future Value analysis used the Nasdaq 100's one-year historical volatility of about 41% in its research note. If it had used the index's five-year historical volatility of about 19%, the note would have received a risk rating of less than 2 out of 10, she said.

"Because there's a higher risk of breaking the barrier, there'll be a higher riskmap score," Hampson said.

Products becoming riskier

Hampson noted that U.S. structured products have seen their risk scores move slightly toward the riskier end of the spectrum since April, based on products that Future Value rated.

Based on notional amounts, Future Value assigned the highest number of structured products with risk scores of 2 and 3 out of 10 in April, whereas the risk scores that were assigned to the most products in October had shifted to 4 and 7 out of 10.

The increase in product risk is not surprising, Hampson said.

"I don't think it's that surprising, especially since April market volatility has gone up," she said.

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