RBC launches bearish notes linked to apparel, footwear retailers; Svensk sells more Elements ETNs

By Kenneth Lim

Boston, May 2 - Royal Bank of Canada announced a series of bearish notes linked to the apparel and footwear retail sector on Friday, tapping current interest in the outlook for the U.S. economy.

"Our client's view is that the pullback that the U.S. economy has experienced is not over," RBC Capital Markets director Laurence Kaplan told Prospect News.

RBC notes bear on retail names

RBC plans to price the zero-coupon bearish buffered equity investment notes due June 20, 2009 linked to the negative performance of a basket of seven stocks.

The basket comprises equal weights of the common stocks of Carter's Inc., Nordstrom Inc., Steven Madden Ltd., Timberland Co., Chico's FAS Inc., Children's Place Retail Stores Inc. and J.C. Penney Co. Inc. The companies are all in the retail apparel and footwear markets.

At maturity, the notes will return par of $1,000 plus 1% for every 1% that the basket finishes below its initial level, capped at a maximum total return of 128% of the principal. If the final basket level is between its initial level and 110% of its initial level, the payout will be par. Investors will lose 1% of their principal for every 1% that the basket increases above the buffer level of 10%.

Strategy initiated by client

The idea behind the notes was initiated by clients of RBC, Kaplan said.

"This note, as are most of our notes, is based on reverse inquiry," he said. "One of the dealers in our network brought us the idea. They picked the stocks and we structured an investment that implements their view...Our client picked the stocks; we basically gave him something to work with in terms of the structure."

"RBC has no particular view on this strategy," he added.

The notes' strategy bets that the retail sector will continue to take hits from problems in the U.S. economy, Kaplan explained.

"They [the clients who requested the notes] feel that the next expression of the recession will be a pullback in consumer spending which will manifest itself in the price performance of these retail stocks," he said.

Kaplan acknowledged that the buffer level was not on the high side, but said the clients who requested the strategy were confident about their view.

"In our clients' view, the cap was not as high as they would have liked to see," Kaplan said. "They are much more bearish on the sector."

Svensk sells more ETNs

AB Svensk Exportkredit sold a further $44 million of Elements exchange-traded notes, bringing the amount that it has raised from those notes to almost $400 million.

Svensk, through agents Merrill Lynch and Nuveen, added $20 million in principal amount to its issue of Elements due Oct. 24, 2022 linked to the Rogers International Commodity Index - Total Return. It has now sold $107.5 million of those notes.

It sold a further $15 million of notes linked to the Rogers International Commodity Index - Agriculture Total Return, bringing its tally for that product to $265.5 million.

Svensk sold an additional $5 million of the product linked to the Rogers International Commodity Index - Energy Total Return, bringing the total to $8 million for those notes.

The notes linked to the MLCX Grains Index - Total Return added $4 million for a total of $8 million.

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