Eksportfinans' autocallables tied to SPDR S&P Metals seen as complement, not stand-alone tool

By Emma Trincal

New York, June 6 - Eksportfinans ASA's 0% autocallable access securities with fixed percentage buffered downside due July 1, 2013 linked to the SPDR S&P Metals and Mining exchange-traded fund offer an attractive structure, financial advisers said, but the strategy may not fit the broad-based needs of many investors.

Wells Fargo Securities, LLC is the agent.

"It's an indirect play on commodities, but it's a sector play," said Carl Kunhardt, director of investment management and research at Quest Capital Management.

The notes will be called at par plus a call premium if the fund closes at or above the initial level on any of three call dates, according to a 424B5 filing with the Securities and Exchange Commission.

The call premium will be 8% to 10% if the notes are called on July 2, 2012, 12% to 15% if called on Jan. 2, 2013 and 16% to 20% if called on June 24, 2013. The exact call premiums will be set at pricing.

The payout at maturity will be par if the shares fall by up to 10%. Investors will be exposed to any fund decline beyond 10%.

Not stand-alone

"This note is a good complement. It's a hedging tool. It should not be used as a stand-alone investment," said Michael Kalscheur, financial adviser with Castle Wealth Advisors.

"It's not designed to give a broad-based commodity exposure given the specificity of the underlying," he added.

The SPDR S&P Metals and Mining fund tracks the performance of the S&P Metals and Mining index, a sector of the U.S. equity market. The index includes companies that develop and produce steel, coal, consumable fuels and diversified metals, including gold, as well as mining companies.

"The notes could be used as a complement to an existing commodity exposure or to hedge some individual stocks in this sector," said Kalscheur.

He offered an example. If an investor owned some of the mining stocks in the index or equivalent stocks from the same sector and wished to reduce the volatility of his long only position, the notes would represent a valuable tool, he said.

"If the portfolio is way up, you fully participate to the upside with your long-only exposure and the notes would give you a little piece extra," he said. "If things do go down, you get a hedge with the buffer."

Kalscheur said that he liked the point-to-point downside protection. If he had to choose as a hedging tool between owning the fund with a stop loss and using the notes, he said that his preference would be to go for the notes.

"If the market tanks and is down 15% but re-bounces, I'm better off with the note than with a [90% stop loss,] which would trigger a loss."

Not for bulls

One thing the note is not, he noted, is a suitable investment for bullish investors.

"If you're bullish on the sector and think it's going to be up more than 20% in two years, you just want to hold the fund outright, not this product," he said.

Bullish investors should also be aware of the limited scope of the sector represented by the underlying.

"If you're bullish on gold or bullish on corn, this note is not for you either," Kalscheur said.

"But if you're not overly aggressive on the sector, if you don't think commodities are going up 30% to 50% over the next two years as they did in 2009-10, it would be a good addition to your portfolio.

"Most people would be happy with an 8% to 10% return a year. And it's realistic."

He added that all it takes to get the call premium is for the fund to stay the same as its initial value. As a result, the notes would fit the needs of a neutral or moderately bullish investor looking to outperform the exchange-traded fund, he said.

"If the market is up 5%, you're better off with the structured note than with the fund. And if the market is down 5%, you're still better off," he said.

Fair structure

Advisers said that the structure was appealing to investors.

"I don't think the structure is bad. I like principal protection, I like buffering. The terms are reasonable," Kunhardt said.

For Kalscheur, the note passed the "smelling test of risk reduction."

"The double-A rating puts you in the high tier, and the name provides diversification if you have multiple holdings," he said.

"The 10% downside protection is an obvious benefit. I would love to have more of course, but for a relatively short term, 10% makes a lot of sense. The largest term is two years, the shortest one year. I'm not too worried about liquidity risk."

What it takes

But the positive aspects of the structure may not be enough for advisers to recommend the product to their clients.

Kunhardt said that there was nothing wrong with the product. Yet, he would not buy it.

"The note offers a buffer on a sector that ought to do well if the global economy picks up. We need more and more metals, industrial metals. Electronics that we use have metals in them.

"If you have a bullish outlook on the economy, you would think that that sector would do well."

But Kunhardt said that he was not interested in narrowly focused strategies.

"We are bullish on the economy. But we just don't do sector investing. It wouldn't fit into our model because we just don't slice the pie that thinly," he said.

"It's part of our defensive approach. We got partially involved in the late 1990s in technology and it didn't end up very well.

"We are so conservative; our value proposition is to tell our clients that we can make more money simply by losing less on the downside. When you lose less, it takes you less time to get back to even and you have more time to make more money."

Timing is everything

Kalscheur would consider the product as a complement to a long-only portion of his portfolio. But another condition would need to be met.

"My investment decision would depend on the timing," he said.

"We would have to check out what the market would be in three weeks. If the market is down 10%, then it may be a good time because the upside potential may be greater.

"We did a lot of structured notes last spring when we thought the market was overvalued.

"In the summer, we didn't because we thought it was undervalued.

"Depending on where the market is when pricing comes out in a couple of weeks, I would consider it."

The ETF is down nearly 3% year to date. Over the past 10 years, the fund has gained 67%.

The notes are expected to price in June and settle in July.

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