Goldman's 12- to 14-month notes on Topix for Svensk seen as bet on value, Japanese recovery

By Emma Trincal

New York, March 21 - AB Svensk Exportkredit's 0% equity index-linked notes linked to the Topix index are both a bullish bet on Japanese stocks and a value investing opportunity in the wake of the Japanese earthquake, which has propelled a sell-off that is now attracting buyers, sources said.

Since the March 11 disaster, the Topix index, an equity benchmark of 1,669 companies trading on the Tokyo Stock Exchange, has lost 11%.

The maturity of the notes will be between 12 and 14 months after issue, according to a 424B2 filing with the Securities and Exchange Commission.

Goldman Sachs & Co. is the underwriter.

The payout at maturity will be par plus the index return, which could be positive or negative.

Bullish bet

"If you think the economic situation in Japan is going to improve, it's a way to play that," a New York trader said.

"I like it. I wish I had it on my system. I would use it," said Carl Kunhardt, director of investment management and research at Quest Capital Management.

Kunhardt said that he receives his offerings exclusively from the Raymond James platform.

"It's a pure broad market play on Japanese stocks grossly underappreciated now because of the disaster. It's not like Japan is going to check off the planet. There's just been an unreasonable sell-off of Japan. Meanwhile, their large companies do most of their business offshore," he said.

"I'm pretty bullish on Japan. I don't underestimate Japanese. I know them. What other country in the world would have an earthquake and a tsunami and no looting? That's how Japanese are. They will rebuild."

Kunhardt said that he also liked the 12- to 14-month term of the notes.

"I think their stock market can appreciate within that time. It's a good timeframe because you're not making a long-term bet. You're just taking advantage of the situation," he said.

Buy low, sell high

Other investors who don't necessarily have a strong bullish conviction on Japan believe that the market sell-off following the earthquake has been overdone. They see in Japanese stocks a value investing opportunity. Michael Kalscheur, financial adviser at Castle Wealth Advisors, is one of them.

"The market has over-reacted to Japan in general, and this is an opportunity to get in at a favorable price. You buy these notes at a lower value and hopefully you have something that has appreciated in 12 months," Kalscheur said.

Kalscheur said that he has been considering investing in Japan through exchange-traded funds in the wake of the earthquake. He looked at two specific products: the WisdomTree Japan Hedged Equity fund and the iShares MSCI Japan index fund. Compared to structured notes, these ETFs offer two advantages, he said: liquidity and absence of credit risk. But he said he would not rule out the structured notes as the cost differential and the absence of tracking errors could make the notes more attractive.

"We've been talking internally for almost a week about the Japanese sell-off and tried to see if this is something we can capitalize. I don't know all the details about this product to give an apple-to-apple comparison with the two ETFs we've been considering. But this type of note is exactly the type of investment we would be looking for," he said.

"It's a good product. I don't have enough information, but it passes the smell test."

Kalscheur added that there were a few aspects of the structure itself that he liked.

"It's a very simple product, which I like right off the bat. It's easy to explain to a client," he said.

"I also like that the underlying is a broad index. You're basically buying 1,669 stocks on the Japanese stock index. It makes sense.

"Having a third-party issuer offers some diversification of the risk. If you had a lot of structured notes in your portfolio, that would be a selling point. Assuming the credit is good, it would be even better."

The fact that the notes offered no leverage and no buffer was neither a plus nor a minus.

"The product doesn't reduce the risk and doesn't enhance gains to the client. On that part, I'm neutral," he said.

Kalscheur said that "I'm still somewhat bullish on Japan" but that timing was important.

"The market is up from its low last week, if it's the low. I would have loved to buy the Nikkei last week when it was at 8,200. Now it's at 9,200."

The Topix index peaked this year on Feb. 21 at 974. On March 15, in the immediate trading day after the earthquake, it dropped by more than 21% to 766. The index is already up more than 8% from that low to 830.

Goldman Sachs has been selling similar notes on a regular basis through the same issuer and before the earthquake. Last month, for instance, the agent sold $46.6 million of similar notes with a 14-month maturity in three separate offerings.

"If you were bullish on Japan before the earthquake, obviously this would be a good time to buy," said Kalscheur.

Notes versus ETFs

Some sources stressed that the notes may offer benefits compared to a straight ETF.

"Sure, you could do the same trade with an ETF. However, with an ETF, you're taking the risk of tracking errors, while with these notes, there's no such risk. It's point to point," said Kunhardt.

"An ETF would do it. But this note is probably designed for fixed-income investors. They create an equity wrapper on something that's not equity. There are people out there who can only buy fixed-income. For those, this note would be helpful. It gets around any charter issue if they're restricted to fixed income only," the New York trader said.

"There's also the fact that in Japan, rates can only go higher. People may not want to buy Japanese bonds because they would be losing money on a capital appreciation basis. Here's a way to participate in a bull market in Japan with taking that interest-rate risk."

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