Eksportfinans launches absolute return notes linked to S&P 500; issuer credit risk top concern for advisor

By Kenneth Lim

Boston, June 3 - Eksportfinans ASA's new absolute return trigger notes linked to the S&P 500 index could be attractive to investors concerned about the current uncertainty in the equity markets, a distributor said.

Eksportfinans launches S&P 500 notes

Eksportfinans, coming to market through Goldman, Sachs & Co., said it plans to price a series of 18- to 20-month zero-coupon absolute return trigger notes linked to the S&P 500.

The notes, which will be offered at par of $1,000, will pay 95% of par plus 1.5 times the absolute index return at maturity if the index ends within an upper trigger level of 121% to 124% and a lower trigger level of about 70%. The exact trigger levels will be set at pricing.

If the index ends outside of the trigger range, investors will receive 95% of their principal. The index must therefore finish higher or lower by at least 3.33% for investors to receive at least par.

Market volatility could help notes

The Eksportfinans notes could be attractive for investors who are uncertain about the equity markets.

"With what's going on right now, a product like this could actually seem quite attractive," the distributor said.

"Yesterday's downgrades...and the reaction of the market shows just how much nervousness there is in the market right now. A product like this could do well in this kind of market, when people aren't sure where the market is going.

"Whether the index goes up or down, as long as it's within the range, you get a positive return, and it's a leveraged return. If you're looking at a range of 70% to 22.5%, that's about 50 percentage points in an 18- to 20-month period, so it's not unthinkable that the index will end up within the range."

But the distributor said investors stood to lose if the S&P 500 does better than expected.

"Your risk on the downside, that means if the S&P doesn't do well, isn't that great, because if you get back 95% of your principal when the index has gone down by 31%, you're still doing better than the index," the distributor said. "But if the S&P does really well, it breaches that upside trigger, then you'll be seriously underperforming."

In other words, investors will also require the S&P 500 to be volatile, but not too volatile, the distributor said.

"There are quite a few ranges that you need to watch for," the distributor said. "You want it to stay within the trigger levels. But you also want it to go beyond plus and minus 5%."

Issuer risk a top concern

Blue Bell Private Wealth Management managing partner and chief investment officer J. Scott Miller said the risk of an issuer default is his top concern, although this week's credit downgrades of three major banks have not crippled the structured product market.

Standard & Poor's cut its credit ratings for the three banks on Monday, citing weakness in the investment banking business and the potential for write-offs. Morgan Stanley's credit rating was cut to A+ from AA-, while Merrill Lynch and Lehman saw their ratings lowered to A from A+.

"I don't think it's going to have a huge effect yet," said Miller, who is managing partner and chief investment officer of the Blue Bell, Pa.-based wealth management firm. "I think the huge effect would come if there were further concerns in the whole financial system."

"The credit quality of issuers continues to be my No. 1 concern when it comes to structured products," he added.

"What we're doing differently, again, is doing our best to lessen our exposure to any one bank," he said. "We haven't done any Lehman...I can't imagine us doing anything right now with them. We don't have hard and fast caps, but yes, we are watching our percentages."

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