Timing at issue for Rogers agriculture-linked notes to be priced by Merrill for Eksportfinans

By Emma Trincal

New York, June 27 - Eksportfinans ASA's upcoming 0% Accelerated Return Notes due September 2012 linked to the Rogers International Commodity Index - Agriculture Excess Return represent a risky trade in today's commodities market given the notes' lack of protection and the timing of the offering July, sources said.

The payout at maturity will be par of $10.00 plus triple any gain in the index, up to a maximum payout of $11.30 to $11.70 per note, according to an FWP filing with the Securities and Exchange Commission. The exact cap will be set at pricing, which is expected to be in July.

Investors will be exposed to any index decline.

Bank of America Merrill Lynch is the agent.

"Timing is everything," a New York-based financial adviser said.

"It's perfectly all right to use derivatives, but commodities are heading down. We're finishing the bull cycle. Why would you want to do that now?"

Big deal in May

The deal follows Eksportfinans' $64.32 million issue of 0% Accelerated Return Notes due July 31, 2012. Bank of America Merrill Lynch priced the popular offering on May 26.

Many of the terms were the same: duration, issuer, underlying index and leverage factor. One difference was the cap, which at 18.6% was higher.

Fees were 2%.

"I wish I had that $64 million in my fund," said Matthew Bradbard, president at MB Wealth, a commodities brokerage firm. As for the new notes, "it makes no sense."

He said that the timing of the new notes is risky after the recent spike in agriculture commodity prices and the strong volatility in the asset class more broadly in the past two months.

Sector play

Tim Fortier, managing partner at Structured Products Advisors, LLC, said the notes' main weakness is the absence of protection.

He said that the deal priced last month may have been popular because getting access to commodities, especially a specific sector, is not always simple for non-sophisticated investors.

"Most investors don't have futures trading accounts, at least it's my experience," he said.

"Agriculture commodities may be attractive given that worldwide demand continues to grow.

"But it's not like there is no other way to get access to agriculture." He pointed to AB Svensk Exportkredit's Elements exchange-traded notes linked to the Rogers International Commodity Index - Agriculture Total Return and the PowerShares DB Agriculture exchange-traded fund.

Both the ETN and the ETF are liquid relative to the notes, he said. They are listed on the NYSE Arca under the ticker symbols "RJA" and "DBA," respectively.

Fortier said he is unsure whether betting on agriculture commodities offers much more value than using a broad-based index such as the S&P GSCI index.

"The RJA ETN and the S&P GSCI index are pretty much correlated anyway," he said.

14-month term

For Fortier, the main risk posed by the new notes is about timing and duration.

"In the next 14 months, these kinds of structures or investments with no protection will put your money at risk," he said.

"It's too short-term. Commodities have started a correction."

The market, he added, is very uncertain at this point given the ending this month of the Fed's Treasuries-buying program known as QE2, or quantitative easing round two.

"There's been a direct correlation between all asset classes as central banks did everything they could to reflate the global economy," he said.

"This was the support. Now we're at a turning point. Everything is in jeopardy as we hit upon one of those dislocations.

"Being bullish on commodities may be the right view based on macro trends, but these trends tend to take a long time to play out. It takes more than 14 months.

"Meanwhile, the central banks are no longer flooding the market with liquidity. There's danger short term."

Fortier said that such a market environment makes the lack of any principal protection even more problematic.

"People should approach investments by assessing risk first and returns second," he said.

"Volatility is likely to expand over the coming months even if there is still a lot of complacency."

Lagging the bull

Bradbard, whose specialty is to trade futures and options on commodities only, said that the downside risk of the notes is aggravated by the way agriculture commodities have soared until recently.

The top four holdings in the underlying index - wheat, corn, cotton and soybeans, whose combined weights represent just about 50% of the benchmark - have already jumped in price at extreme levels over the past 14 months, he said, increasing the odds of a correction.

"Corn over the past 14 months is up 56% from $4.00 a bushel to $6.25. They're capping you out. That's beyond me," he said.

"Wheat has gone all over the place, up and down. From $5.75 to $9.50 then back to $6.20. Depending on when you jumped off that ship, it could have been a good or a bad idea.

"Soybeans went from $9.50 to $14.50 then back down to $13.50. Still, that's a 40% increase.

"And cotton recorded its highest price increase since the Civil War a couple of weeks ago. It went from 80 cents 14 months ago to $2.10 and then down to $1.60. It's still up 100%.

"Prices have come off, but they're still way up."

No buffer

"My point is you have two problems with this deal: the cap and the full exposure to losses," Bradbard said.

"Having a cap is always a bad thing. But having no downside protection is potentially disastrous.

"Instead of having no downside protection and a cap, as an investor I would want the opposite."

The New York-based financial adviser agreed.

"No downside protection and a cap. Why don't they take the cap off?" he said. "There is no excuse for this."

The notes will settle in August.

© 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.