Find

Home > Private Customers > Investment and savings > Index-linked bonds > Previous index-linked bonds > Index-linked Bond Commodities

Index-linked Bond Commodities

Basic and Extra

Why invest in Index-linked Bond Commodities?

Commodity markets have recovered relatively quickly from the slump caused by the financial crisis and the recession. Indeed, the prices of energy, agricultural commodities and industrial metals have risen strongly from the bottom levels seen during the recession. The reasons behind this trend are the strong global growth, which is creating demand for raw materials, and the limited supply of raw materials. Global growth is taking place primarily in the emerging markets, especially the Asian economies, where consumption of raw materials continues to grow at a relatively fast pace.

Rising prices, in other words higher inflation, means weaker purchasing power. Historically, commodities have provided a good hedge against inflation. An investment in commodities may not only help maintain purchasing power; it may also prove to be a profitable alternative alongside equity and fixed income investments.

Raw materials are now more topical than ever. After the nuclear power plant accident in Japan, several nuclear plant projects have been cancelled or the application process has been halted both in Europe and in Asia. As there is no emission-free energy form available, nuclear power will probably be replaced by fossil fuels in the future. Should the situation in Northern Africa and the Middle East escalate, this could spark a strong reaction in the price of oil.

Index-linked Bond Commodities gives you cost-effective exposure to the commodity markets with capital protection; if the prices go up, the value of your investment will increase, and even if the prices dropped, you will still get the invested nominal capital back at maturity.

Yield on the investment

Index-linked Bond Commodities is an approximately 3-year bond issued by Nordea Bank Finland Plc. The yield is based on the performance of a commodity basket consisting of six commodities. The bond comes with two alternatives: Basic and Extra. The alternative Basic is suitable for a cautious investor. Its yield at maturity is 70% of the increase in the value of the commodity basket in accordance with the terms of issue. The alternative Extra suits risk-tolerant investors who seek a higher return. Its yield at maturity is 200% of the rise in the value of the commodity basket in accordance with the terms of issue. Regardless of the commodity basket performance, Nordea repays the nominal capital of the bond at maturity.

The rise in the commodity basket value is the average of the changes in the value of individual commodities. The performance of a commodity is calculated as the difference between its initial price and final price. The initial price is the closing price of the reference asset (commodity) on 27 May 2011. The final price is the closing price of the reference asset on 30 May 2014. For coal the market standard will be used when setting the initial and final price. The calendar month fixing for coal is set as an average of Friday fixings for the month. If the value of the commodity basket falls or remains unchanged, no yield is paid.

Commodity basket

The commodity basket consists of equally weighted (1/6) commodity futures serving as the reference assets: crude oil (brent), coal, copper, corn, sugar and cotton. These commodity futures are traded on the commodities exchanges of London, New York and Chicago. More information on the reference assets and their price performance is available on the Internet at www.argusmedia.com (coal) www.cbot.com (oil, copper, corn and cotton) and www.theice.com (sugar).

Performance of the commodity basket, October 2001 – April 2011

Price history of coal since October 2008. Starting level indexed at 100%. Source: Bloomberg and Reuters.

The presented figures describe previous yield or performance, and no reliable assumptions on future yield or value can be made based on them.

Risks of the investment

The index-linked bond involves a risk of the issuer Nordea Bank Finland Plc’s repayment ability. The risk relating to the issuer's repayment ability means the risk that the issuer becomes insolvent and cannot fulfil its commitments. The investor can lose the invested capital and the possible yield partially or in full in the event of the issuer's insolvency. Nordea has a credit rating Aa2 by Moody's and AA- by Standard & Poor's. The bond is unsecured.

The investor can lose the invested capital for the part exceeding the nominal value either partially or in full. In the Extra bond this premium risk is about 10%, as its subscription price is about 110%. The investor can also sell Index-linked Bond Commodities on the secondary market before maturity. The repurchase price may be above or below the bond’s nominal value. In normal market conditions Nordea quotes a secondary market price for the bond on all banking days when banks are generally open in Finland.

Yield table: Index-linked Bond Commodity Basic and Extra

Change in the commodity basket according to the terms of the issue	Commodity Basic		Commodity Extra
	Issue price ca.	100%	Issue price ca.	110%
	Participation rate	70%	Participation rate	200%
	Value at maturity	Return p.a.	Value at maturity	Return p.a.*
100%	170%	19.3%	300%	39.7%
75%	153%	15.1%	250%	31.5%
50%	135%	10.5%	200%	22.1%
25%	118%	5.5%	150%	10.9%
0%	100%	0.0%	100%	-3.1%
-25%	100%	0.0%	100%	-3.1%
-50%	100%	0.0%	100%	-3.1%

Simulated historical yield

The historical value at maturity, had the investment been made in accordance with the issue terms in October 2001 – April 2008, and the yield on a direct investment in the commodity basket. The investment would have matured in October 2004 –April 2011 (weekly observations).

	Average value at maturity	Average annual return
Basic	142.9 %	12.6 %
Extra	222.5 %	26.5 %*
Direct investment	161.1 %	17.2 %

* 10% premium included in the yield calculation.

Issue terms in brief

Issuer	Nordea Bank Finland Plc; credit ratings Aa2 (Moody’s) and AA- (Standard & Poor’s).
Loan number and ISIN	Commodities Basic 4507A FI40000024096 Commodities Extra 4507B FI40000024104
Issue date	26 April 2011
Maturity	14 June 2014
Subscription period	26 April – 19 May 2011
Places of subscription	Nordea Bank Finland Plc branches, Nordea Private Banking and Nordea Customer Service with access codes, tel 0200 70 000, Mon–Fri 10.00–16.30 (local network charge/mobile call charge), and Netbank at nordea.fi.
Subscription price	Basic 4507A: variable, about 100% Extra 4507B: variable, about 110%
Minimum subscription	1,000 euros
Yield at maturity	Basic 4507A: 70% of the rise in the commodity basket value in accordance with the issue terms Extra 4507B: 200% of the rise in the commodity basket value in accordance with the issue terms
Reference asset	The following commodities serve as the reference assets (together the 'commodity basket'): 1/6 Brent crude oil (Bloomberg: CO1 Commodity) 1/6 Coal (API 2, Argus McCloskey´s Coal Price Service) 1/6 Copper (LOCADY Commodity) 1/6 Corn (C 1 Commodity) 1/6 Sugar (SB1 Commodity) 1/6 Cotton (CT1 Commodity)
Initial price	The closing prices of the reference assets on 27 May 2011
Final price	The closing prices of the reference assets on 30 May 2014.
Repayment of capital	The issuer Nordea Bank Finland Plc repays the nominal capital of the bonds in full at maturity irrespective of the performance of the commodity basket. The bonds involve a risk of the issuer’s repayment ability and of losing the premium (in Extra bond about 10%).
Security	The bond is unsecured.
Structuring cost	The subscription price includes a structuring cost of about 0.8% p.a. (see the terms of issue for more details). No separate subscription or management fee is charged on the bonds.
Secondary market	In normal market conditions the issuer Nordea Bank Finland Plc quotes a repurchase price for the bonds, which may be lower or higher than the nominal value.
Taxation	No tax is deducted at source for non-residents in Finland.
Safe custody	Free of charge with Nordea Bank Finland Plc.
Cancellation of the issue	The issuer has the right to cancel the issue based on changes in the economic circumstances or if the total amount of subscriptions is low, or if something should occur that the issuer considers might endanger the issue.
Listing	If the total amount of subscriptions is sufficient, an application will be made for the bonds to be listed on NASDAQ OMX Helsinki.

Loans 4507A (Index-linked Bond Commodities Basic) and 4507B (Index-linked Bond Commodities Extra) under the MTN programme (a medium term note programme reported to the Finnish Financial Supervisory Authority from Sweden in accordance with the Prospectus Directive) of Nordea Bank AB (publ) and Nordea Bank Finland Plc, dated 25 May 2010. The bond-specific terms and the base prospectus are available at the places of subscription. Read the issue terms and the base prospectus before subscription. The Swedish version of the terms is binding and thus applied in possible dispute situations.

Nordea Markets is the name of the Markets departments of Nordea Bank Norge ASA, Nordea Bank AB (publ), Nordea Bank Finland Plc and Nordea Bank Danmark A/S. The information provided herein is intended for background information only and for the sole use of the intended recipient. The views and other information provided herein are the current views of Nordea Markets on the date of this document and are subject to change without notice. This document is not an exhaustive description of the described product or the risks related to it, and it should not be relied on as such, nor is it a substitute for the judgement of the recipient. The information provided herein is not intended to constitute and does not constitute investment advice nor is the information intended as an offer or solicitation for the purchase or sale of any financial instrument. The information contained herein has no regard to the specific investment objectives, the financial situation or particular needs of any particular recipient. Relevant and specific professional advice should always be obtained before making any investment or credit decision. It is important to note that past performance is not indicative of future results. Nordea Markets is not and does not purport to be an adviser as to legal, taxation, accounting or regulatory matters in any jurisdiction. This document may not be copied, distributed or published for any purpose without the prior consent in writing of Nordea Markets.

Commodity prices pushing up inflation

Recently, investors have showed increased interest in commodities. This interest is partly explained by the general belief that commodity prices will continue to rise. Investment in commodities is also considered a good addition in a diversified portfolio, as the performance of commodities often does not correlate with the rest of the investment market and historically commodities have provided good protection against rising inflation.

Political uncertainty and natural catastrophes are tightening oil and coal markets

Oil is one of the most important sources of energy and one of the most used raw materials in the world. Economic growth requires energy, and the improved economic outlook together with the lack of investments, which followed the recession, are creating upward pressure on the price of oil. With the risk of the turbulence in Northern Africa spreading to the most important oil-producing countries, the price of oil is likely to remain high in the near future, too.

Coal is a fossil fuel, and nowadays coal is burnt mainly in power plants. Besides being a source of electricity and heat, coal is an essential raw material in the production of iron and steel, in the manufacture of cement and in many other industrial processes. The developed countries have tried to curb the use of coal in the production of energy, but on the other hand, demand for coal is increasing particularly in the emerging economies such as China. Furthermore, growing anti-nuclear attitudes around the world may lead to increased burning of coal as an energy source also in the Western countries.

The outcome of the tragic earthquake in Japan and the nuclear power plant accident caused by the tsunami that followed is still wide open. After the reconstruction work starts, demand for energy is expected to increase. The lost nuclear energy will largely be replaced by fossil fuels such as crude oil, coal and natural gas. As a result of the natural catastrophe in Japan, at least seven nuclear reactors in Germany and in China have been either shut down or the application process has been halted. Tightening security requirements for nuclear power and prolongation of the launch process worldwide are likely to increase demand for oil and coal.

Prices of agricultural products are facing upward pressure

Demand for agricultural commodities, such as corn, sugar and cotton, is expected to increase in future. Combined with the limited production, the increasing demand is expected to lift the prices of agricultural products. Some reasons for the swelling demand are the growing affluence and more and more westernised way of living in emerging economies, such as China and India, the expanding use of biofuels and population growth.

Corn and sugar are raw materials for ethanol used as biofuel. Given the rising oil price and the strengthening environmental values among consumers, demand for renewable energy will increase, which is set to increase demand of corn and sugar. In the Western countries, the popularity of biofuels has led to a situation where farmers are motivated to produce grain and sugar as raw material for bioenergy instead of producing food.

Cotton is a soft fibre that is obtained from shrub-like cotton plants and used in yarn and textiles. Cotton is used in about 45% of all textile fibres. Recently, demand for cotton has outpaced supply due to a number of production constraints, including flooding in Australia and the export restrictions that India has imposed on cotton in order to protect its own industry.

Price of copper supported by global growth and urbanisation of emerging countries

Demand for copper comes primarily from the electronics and construction industries. The world's single largest buyer of copper is China – the country's strong economic growth consumes a huge amount of this raw material. Investment in infrastructure is expected to increase as a result of growing urbanisation in the emerging countries. It is forecast that in India, for example, there will be a need of infrastructure investment (roads, electricity and railways) worth some EUR 1,300bn during the next decade.

Source: Nordea Economic Research, World Bank