Svensk's $185.75 million 9.75% STEP notes linked to Ford provide high yield to moderate bulls

By Emma Trincal

New York, March 15 - AB Svensk Exportkredit's $185.75 million of 9.75% STEP Income Securities due March 23, 2012 linked to the common stock of Ford Motor Co. are for investors moderately bullish on the stock who are looking for income, according to sources.

The offering was sold by Merrill Lynch, Pierce, Fenner & Smith Inc., according to a 424B2 filing with the Securities and Exchange Commission.

If the stock finishes at or above the step level, the payout at maturity will be par of $10.00 plus 3.45%. The step level is 109.75% of the initial share price, and the initial share price on Thursday at pricing was $14.12.

If the stock finishes at or above the initial share price but below the step level, the payout will be par.

Investors will be exposed to any decline in the share price.

Not highly bullish

"If Ford is at or above $15.49 at maturity, you will have received the 9.75% paid quarterly plus 3.45% on top. So if you are neutral to moderately bullish and like Ford, you may consider investing in this," a market participant said.

The $15.49 price is equivalent to 109.75% of the initial share price.

Ford shares closed at $14.67 (NYSE: F) on Tuesday, up 2.59% for the day.

Sources also said that the notes are capped as the return paid to the investor will never exceed the sum of the interest payment and the step payment, if any, as stated in the prospectus. Therefore, the maximum rate of return is 13.2%.

According to the prospectus, investors in the notes should expect the closing price of Ford to be at least equal to the step level. As a result, the notes are best suited for investors who project a growth of the stock within a 9.75% to 13.2% range.

"You have to be somewhat bullish. You get the appreciation within limits, and you're capped out," the market participant.

"You're trading off any appreciation beyond that cap for the coupon."

"The risk you run is that the stock would appreciate more than 13%, but even then, a 13% rate is still a very good rate of return," said Peter Rup, chief investment officer at Artemis Wealth Advisors.

Rup said he does not have a view on Ford but predicts that the auto sector will do well as he sees the economy continuing to expand unless the oil crisis worsens.

Exposure to losses

Even through there is no guarantee of principal, Rup pointed to the coupon as playing de facto the role of a buffer on the downside.

"Your first 10% downside is protected," he said.

"It sounds like a reasonably priced product with the right parameters."

But others were more concerned about the lack of barrier or buffer.

"Merrill Lynch has hundreds of thousands of clients. It's like a calendar offering. They need something for their salespeople to sell. It may be a good product. But I'm sure that in this low interest rate environment, it's being marketed for the coupon. And while it's an attractive coupon, people should know that they're still exposed," the market participant said.

The product may be used in other ways, he added.

"It could be for investors who already own the position and had the stock for sometime and probably made money on it. You can sell it. Or you might still want to get exposure, and it's a way to do it," he said.

For the more conservative investor, a high coupon will not offset the risks involved with the product.

"One of my concerns would be counterparty risk. What if something happens to the issuer? The 9.75% coupon is not a guarantee," said Scott Brewster, a financial planner at Brewster Financial Planning.

"My second concern is that you're capped at 13% on the upside and not on the downside. Often stock returns are explosive in both directions, up and down. So you're going to be missing some of the potential upside and you could be missing a lot.

"These things always make me nervous. The good side is this nice interest payment. But I always focus on the bad sides. Even with this great coupon, I wouldn't be comfortable."

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