Accelerated growth products spike; structure attracts investors eyeing market bottom: analyst

By Kenneth Lim

Boston, May 29 - Issuers have recently pushed out more accelerated growth products, which could suggest that the markets and investors are settling down after a tumultuous year, said structured products analyst Suzi Hampson of Future Value Consultants.

Meanwhile, a recent warrant linked to one-month Libor by Credit Suisse, through its Nassau branch, is a stripped down structured product that could be useful for investors seeking protection against rising rates, Hampson said.

Svensk links to S&P 500

AB Svensk Exportkredit plans to price zero-coupon Accelerated Return Notes due September 2010 linked to the S&P 500 index.

At maturity, investors will receive par plus triple any gain in the index, subject to a maximum total payout of 117.5% to 121.5% of the principal. Investors will lose 1% for every 1% decline in the index. The exact payout cap will be set at pricing.

Merrill Lynch is the placement agent.

Future Value rated the Svensk product an overall 5.09 out of a best possible 10. In terms of risk, the product scored 7.3 out of a riskiest possible 10.

"This investment offers potential enhanced returns on small to moderate market gains," Future Value stated in a research note. "However the principal is at risk."

Recent spike

A glance at Future Value's recent reports shows that 13 of the latest 20 were accelerated growth products, a spike from recent weeks.

Hampson cautioned that one week's figures do not indicate a trend and noted that accelerated growth products have always been popular with investors in the United States. After reverse convertibles, accelerated growth products are probably the most popular structure here, she said.

But an increase in accelerated growth products could suggest that investors are becoming more comfortable with products that leave principals at risk.

"After Lehman and all of that last year, we saw quite a rise in capital protection and any sort of capital protected products, CDs, that sort of stuff," Hampson said. "This could be a suggestion that people are settling back down."

Investors who think that the markets could be hitting the bottom will find accelerated growth products attractive because they tend to perform best with small gains in the underlying, Hampson explained.

"They always have geared returns," she said. "If you've lost a lot of capital the last year, this is one of the quick ways to make double what the index does."

Hedge against rising rates

Hampson noted that Credit Suisse's recent offer of warrants due June 2016 linked to one-month Libor could be used as a hedge against rising swap rates.

The warrants will be sold in denominations of $100 at an offering price of $6 per warrant.

Each month, holders will receive a cash payment per warrant equal to $100 multiplied by an annualized rate equal to one-month Libor minus a strike level, subject to a floor of zero. The strike level is expected to be 3.25% to 4.5% and will be set at pricing.

One-month Libor must exceed the strike level by an average of at least 0.85715% each month in order for the cumulative cash payments to equal at least the original price of the warrants.

Merrill Lynch is the agent for the Credit Suisse deal.

"If you get a seven-year bond now, the rate is fixed there, and if the interest rate rises much above that, this product would help give a bit of top-up," Hampson said. "You wouldn't really be losing as the rate increases."

More flexibility

Offering the product as a warrant instead of a structured note could give savvy investors more flexibility in deciding the level of return and exposure they want to the underlying rate, Hampson said.

"A sort of normal note would be a combination of some kind of bond and option," she said. "This is just the option part. It's kind of for an investor who's controlling their portfolio more. They can put some here, put some in a bond to create a similar kind of product."

An investor, for example, could invest $20 in the warrant for every $80 invested in a fixed-rate bond. That would effectively create a partially principal protected product.

"There's a bit more flexibility in this," Hampson said.

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