Merrill plans bearish products for Eksportfinans; risky notes timely amid negative sentiment, adviser says

By Kenneth Lim

Boston, March 2 - Eksportfinans ASA plans to offer two bearish products that could attract pessimistic investors who desire short-term gains, an investment adviser said.

Agent Merrill Lynch plans to price zero-coupon Bear Market Strategic Accelerated Redemption

Securities due September 2010 linked to the S&P 500 index for issuer Eksportfinans.

The notes will be automatically called at a price to give a return of 10% to 14% per year if the index closes at or below its initial level on any observation date. The exact call premium will be determined at pricing.

The payout at maturity will be par if the final index level is 110% of the initial level or less. Investors will lose 1% for every 1% that the index increases by more than 10%.

The securities will be listed on NYSE Arca under the symbol "BGJ."

Merrill will also price zero-coupon Bear Market Strategic Accelerated Redemption Securities due September 2010 linked to the Consumer Discretionary Select Sector index for Eksportfinans.

The notes will be automatically called at 10% to 14% per year if the index closes at or below its initial level on any observation date. The exact call premium will be determined at pricing.

The payout at maturity will be par if the final index level is 110% of the initial level or less. Investors will share in losses.

The securities will be listed on NYSE Arca under the symbol "BGO."

Short-term investment

The strategy for both notes will attract investors who are bearish on the U.S. economy, the adviser said.

"Obviously with how the markets are doing right now, there's still quite a bit of pessimism about the economy," the adviser said. "They're probably trying to capitalize on this kind of sentiment, offering people a way to make money even in a bear market.

"As an investor, if you feel that you're in a bear market, you basically want to short the market in order to make money, right?" the adviser said.

"You could buy gold, but gold's gone up so much you're wondering if it's the next bubble. A structured product like this gives you a 10% buffer, which is better than no protection at all, plus a 10% to 14% return as long as the index is down. You don't care if it's down by a little or down by a lot, as long as it's down. So that can be quite a good return."

Investors are also likely to be looking at short-term returns, the adviser added.

"They're only 18 months, so the horizon is quite short, plus these are autocallable notes, so in most likelihood the investor's hoping to cash out at the first call date, which is six months out," the adviser said. "Past the first call date, you still have two chances to get a call, then it goes down. Usually past the first date the chances of the notes getting called go down, so usually you're hoping that they get called earlier."

Risky products

But the products are highly risky investments, the adviser said.

"A 10% buffer isn't much when the index can swing so many points in a single day," the adviser said.

"Another risk is you're only looking at one point in time on each call date, rather than an average of a few days, for example, so you're really fully exposed to that volatility, and if you're unlucky the index may be up on the call date even though it was down the week before. Stuff like that could happen because the structure doesn't protect you from it."

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