Svensk's MSCI EAFE-linked notes to be priced by Goldman may outperform index, limit risk

By Emma Trincal

New York, Aug. 11 - AB Svensk Exportkredit's upcoming 13- to 15-month 0% equity index-linked notes linked to the MSCI EAFE index may outperform the index while giving investors a level of protection, two features that are attractive in today's market, according to financial advisers.

Goldman Sachs & Co. is the underwriter, according to a 424B2 filing with the Securities and Exchange Commission.

The payout at maturity will be equal to the maximum redemption amount if the index return is greater than or equal to negative 10%. The maximum redemption amount is expected to be $1,102.50 to $1,120.00 per $1,000 principal amount of notes - or 110.25% to 112% of par. It will be set at pricing. Investors will lose 1.1111% for every 1% that the index declines beyond 10%.

Risk/return

The most attractive feature of the notes, sources said, is the risk/return trade-off they offer.

Assuming that the maximum redemption amount is 110% of par, investors can expect a 10% gain even if the index is down 10% at maturity, noted Steve Doucette, financial adviser at Proctor Financial.

"That's a good risk/return trade-off," he said.

"A 10% coupon is not a bad return, and you have some protection too.

"Of course there is the risk involved with equity. But you can have a negative return anywhere above minus 10% and still collect a 10% coupon."

Alternative to bonds

Doucette said that he sees the product as an income-generating investment. He would use it as an alternative to some of the bond components of his portfolio.

Despite the Federal Reserve's recent announcement that rates will not be raised until mid-2013, Doucette said that at some point, rates will go up.

"We're structuring something similar to these notes to replace some of our bonds," he said.

"If the equity is slaughtered but goes back up a little bit, then you collect a little bit of a coupon.

"We like those kinds of products for income. Where else in your bond portfolio are you going to find a 10% coupon for one year?"

"So that's part of what we've been doing: replacing our pure bond holdings with those types of income products."

Because the contingent return is also a cap, the notes would not be suitable for all investors, he noted.

"It wouldn't work if you're pretty bullish," he said.

Matt Medeiros, president and chief executive of the Institute for Wealth Management, said that he likes the payout structure as well as the underlying index.

"The idea of a [digital] coupon in this volatile market environment is interesting," he said.

Investors will outperform the index any time the benchmark performance is greater than or equal to negative 10% and less than 10% - a 20% range, which he said is attractively wide.

Consider timing, pricing

Medeiros, however, said investors should be cautious about one aspect of the deal: the possibility that the issuer will set the initial index level higher or lower than the actual closing level of the index on the pricing date.

"The pricing of the security and the timing of the pricing are going to be critical," he said.

"The pricing for obvious reasons: Are they going to price it at the closing price?

"The timing too because the index is already down 20% since the past few weeks. If it prices today, you get good value.

"That's a variable you can't control, and that's the scary part, frankly."

Fundamentals

Medeiros said that he also likes the underlying index, which covers the equity markets of developed countries excluding the United States and Canada such as Western European countries as well as Australia and Japan.

While European stocks have suffered heavier losses than in the United States amid the continent's lingering sovereign debt crisis, Medeiros said the end of the European crisis may be near.

"I don't see the European crisis dragging on for another year. I know that 13 months is considered short, but I believe that the crisis will be short lived too," he said.

"I am not bullish on Europe. But I'm not bearish either.

"The fundamentals in Western Europe remain good. Countries like Germany and the U.K. bring a large contribution to the region's GDP. And the current concerns in France at this point are overblown.

"It seems unlikely that the European sell-off is going to go much further than that."

Medeiros said that he would allocate a small amount of the MSCI EAFE index in his portfolio given the pricing opportunity and the positive fundamentals.

"Something like in the 5% ballpark," he said.

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