Eksportfinans' leveraged notes linked to silver price alongside correction buzz, sell-off

By Emma Trincal

New York, May 4 - A large offering of notes linked to silver had some sources questioning the timing of the bet because many see a correction in silver prices unfolding after a long and strong bull market. The nearly $60 million deal priced last week on Thursday just as silver futures prices began to tumble.

Eksportfinans ASA priced $58.76 million of 0% Accelerated Return Notes due July 3, 2012 linked to the spot price of silver via Merrill Lynch, Pierce, Fenner & Smith Inc., according to a 424B2 filing with the Securities and Exchange Commission.

"A popular deal? Let me guess. People have been buying silver," said Matthew Bradbard, a commodity broker at MB Wealth who has a short position in the metal.

"When a deal is super popular, it usually means people are buying at the top or selling at the bottom."

The payout at maturity is par of $10 plus triple any increase in the price of silver, subject to a maximum return of 34.26%. Investors are exposed to any decline in the price of silver.

Selling pressure

Sources said the deal involves significant market risk because silver had been trading at record highs up until last week.

Silver futures contracts for July delivery have lost 17% in the last three days, said Bradbard.

Market rumors contributed to the selling, in particular a news report saying that hedge fund Soros Fund Management was liquidating positions in gold and silver, sources said.

One contributing factor, said Bradbard, was also the CME Group's decision to raise the margins required from traders to trade silver futures.

"They hiked margins three times last week, and that played out in the sell-off," Bradbard said.

"If you owned silver, you had to put more money. The correction started on Sunday with people trying to sell without finding buyers, and from there it snowballed. But that's only a piece of the story," he said.

'Elevator down'

The real "story," he said, is that the silver price was too rich.

The iShares Silver Trust exchange-traded fund, which tracks the price of the metal, is up 28% year to date and has more than doubled over the past year. Share prices peaked on Thursday at $47.26, which is the day the notes priced. They have declined by 19% since then.

"Silver generally takes the escalator up and the elevator down," said Bradbard.

He said he has been short silver for some time and that it was "painful" as prices continued to soar.

"But investors who stayed with us have now been rewarded," he said.

Bradbard took a contrarian view on silver when he saw prices rising too fast.

14-month outlook

But he does not rule out a good outcome for the notes, which mature in 14 months.

"I'm going to continue selling for the next couple of weeks, but from there I'll be looking for entry points.

"I see new highs with silver possibly trading around $50, maybe $60," he said.

The current spot price for silver is $39.35.

"In 14 months, prices will be higher than four days ago."

Good fundamentals

While silver prices are volatile and hard to predict, a market participant said that fundamentals are good for long-term investors.

"Silver, more than other precious metals, is driven by significant industrial demand," he said. The commodity is used for imaging, electronics, jewelry, super conductors and "even" water purification, he noted.

"It's not just a safe haven like gold. Gold is now considered a global currency, and people use it as a hedge against inflation and the low dollar. Silver is very different from gold," he said.

Call spread

The market participant said that the structure offered by the issuer of the notes was plain vanilla.

"You're selling calls to get the cap, and you're buying more calls to get the leverage. It's a call spread."

With silver prices subject to sharp price moves, some see risk in buying a product tied to this underlying with leverage and no buffer.

"Whether the investor should buy a structured note that provides no protection should reflect the investment view and is a matter of suitability," the market participant said.

"Buying something without protection goes to the heart of suitability, and that's between the investor and the financial adviser."

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.