Svensk ups to $106.819 million notes linked to stock basket, index

By Sheri Kasprzak

New York, Aug. 13 - AB Svensk Exportkredit upsized to $106.819 million its previously announced offering of zero-coupon outperformance notes linked to a basket of 57 stocks and S&P Consumer Staples Sector Select index.

The offering comes after Svensk priced $69.891 million in the notes at the end of July.

In other structured products news, amid continued woes in the mortgage-lending market, UBS AG priced more than $18 million in Bearish Autocallable Optimization Securities linked to the KBW Mortgage Finance index.

The notes, according to one market insider, are "pretty obvious" given the current problems in the mortgage-lending sector. The notes were priced amid news almost every day of mortgage lenders defaulting on repurchase loan agreements or filing for bankruptcy.

The KBW Mortgage Finance index, accordingly, has dropped substantially since May.

Svenks notes link consumer stocks, index

Svenk's notes linked to the stock basket and S&P Consumer Staples Sector Select index are linked to a combination of consumer staples through the index and luxury items through the basket.

"The index is made up of staples," said Tim Mortimer, managing director of Future Value Consultants, a London-based firm that analyzes derivatives products. "They're the biggest companies within the S&P. Coca Cola and McDonald's [for example]. The others [in the stock basket] are kind of more luxury-type consumer stocks [like] Black & Decker, Gap."

Mortimer said the structure makes sense because it's pitting suppliers and big names on the plus side versus more luxury-type companies on the other side, but all of the stocks are in the consumer products sector.

Stocks in the same sector

Keeping the stocks within the same sector as the index, according to Mortimer, plays it more defensive in terms of low volatility stocks against the luxury end stocks.

"If you picked consumer [stocks] versus technology [stocks], there could be something around the corner that might disrupt that play," Mortimer said. "So having two types of consumer stocks makes it more of a bear market type of situation."

The stock basket takes the short position and the index the long position.

Payout at maturity on the 14-month notes will be par plus the amount, if any, by which the index return is greater than the stock basket return. Investors can expect to lose 1% for every 1% the stock basket return exceeds the index return.

Svensk is pricing the notes through Goldman, Sachs & Co. Goldman priced $69.891 million in the notes on July 31.

Components of index, basket

The S&P Consumer Staples Select Sector index includes, in the top 10, Procter & Gamble Co.; Altria Group Inc.; Wal Mart Stores Inc.; Pepsico Inc.; Coca Cola Co.; CVS Caremark Corp.; Kraft Foods Inc.; Walgreen Co.; Anheuser Busch Cos. Inc. and Colgate Palmolive Co.

The index also includes 29 other stocks in the consumer staples sector. As of July 31, the index was valued at 271.80.

The notes are also linked to a basket of 57 stocks. The top 10 of the stocks in the basket are McDonald's Corp.; Target Corp.; Kohls Corp.; Amazon.com Inc.; Carnival Corp.; Johnson Controls Inc.; Nike Inc.; Starbucks Corp.; Best Buy Co. Inc.; and Coach Inc.

UBS's KBW-linked notes

Elsewhere, UBS priced $18,158,240 in 18-month notes linked to the KBW Mortgage Finance index.

"I'm surprised they didn't sell more," said one market source, adding that he feels bear market notes linked to an index based around mortgage finance stocks is "pretty obvious" given current market conditions.

The market insider said Monday afternoon that with mortgage-lending companies releasing news almost every day that they're filing for bankruptcy or getting out of the mortgage-lending business, the KBW Mortgage Finance index is likely to decline before the term of the notes is over.

Assuming the index never closes above the trigger level - which is 120% of the starting level - on any trading day during the period between the trade date and the final observation date, and assuming the notes are called before maturity, the investors will receive par at maturity.

If the index closes above the trigger level on any day during the observation period, investors will receive par times 1 minus the index return.

If the notes are not called, the investors may lose 1% of the principal for every 1% gain in the index over the starting level.

The index's starting level is 83.52, the index's closing level on Aug. 9.

The index has made a steady decline since May. In May, the index traded between 96.50 and 101.31 and in June, it traded between 92.98 and 100.94. In July, the index ranged between 80.57 and 94.57. So far this month, the index has traded between 75.72 and 84.86.

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