Index-linked Bond Luxury
Subscription period till the 24th of February, 2011
Final terms
Basic and Extra
Index-linked Bond Luxury in brief
- A bond issued by Nordea Bank Finland Plc. Its maturity is about five years and its yield is based on the performance of a share basket consisting of the shares of ten international luxury goods producers. An appreciation of max 50% in a single share will be taken into account.
- Participation rate: Basic bond 80%, Extra bond 160%.
- Subscription price variable: in the Basic bond about 100%, in the Extra bond about 110%.
- Minimum subscription: 1,000 euros.
- Subscription period: 17 January–25 February 2011.
- In normal market conditions Nordea quotes a repurchase price for the investment on all banking days.
- The issuer returns the nominal capital of the bond at maturity and pays out the index-linked yield, if any.
- The bond involves a risk of the issuer’s repayment ability and of losing the possible premium.
International consulting firms and analyst believe strongly in companies producing luxury goods. After the industry’s annus horibilis in 2009, the industry is performing strongly again and in 2010 luxury goods sold better than expected. This is due to the improved general economic situation and the rise in consumer confidence as well as the fact that in the past few years the luxury goods market has witnessed the appearance of a new and fast growing customer group: increasingly wealthy Asians. The forecast for total growth in 2010 for the industry is about 10 per cent, but in China, for example, the luxury goods market grew at a pace of over 30 per cent, which already accounts for one third of the annual growth of the whole industry. In addition, the Chinese, the Russians and the Indians account for a large part of the luxury goods companies' sales in Europe. Even the largest of the luxury goods markets, the US, is estimated to have grown as much as 12 per cent in the last year. As a whole, this year's growth is expected to be slightly slower, mainly due to higher benchmark figures, but growth continues to be increasingly China-driven.
The biggest risk factors for the luxury goods industry are the general economic situation and consumer confidence. If the risk of slackening economic growth or of a new recession grows, luxury goods may, as a cyclical industry, have tough times ahead. Index-linked Bond Luxury offers an interesting and safe way to make a diversified investment in some of the world's leading luxury goods producers in which Nordea sees long-term yield potential. The investment also suits investors shunning risk as the nominal capital of the investment is returned at maturity irrespective of the performance of the share basket serving as the reference asset during the investment period.
Index-linked Bond Luxury Basic and Extra
Index-linked Bond Luxury is a bond issued by Nordea Bank Finland Plc. The maturity is approximately five years and the yield is based on the performance of a share basket consisting of the shares of ten international luxury goods producers. There are two alternatives of the bond: Basic and Extra. The alternative Basic is suitable for a cautious investor. Its yield at maturity is 80% of the increase in the value of the share basket according to the terms of issue. The alternative Extra suits investors who tolerate risk and seek a higher return. Its yield at maturity is 160% of the rise in the value of the share basket in accordance with the terms of issue. The issuer returns the nominal capital of the bond at maturity and pays out the index-linked yield, if any. If the value of the share basket serving as the reference asset falls or remains unchanged, no yield is paid.
Risks of the investment
As the bond is unsecured, it involves a risk of the issuer's, 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 hence lose the invested capital and the possible yield partially or in full due to the issuer's insolvency. Nordea has been given a credit rating Aa2 by Moody's and AA- by Standard & Poor's.
The investor may lose the invested capital exceeding the nominal value of the index-linked bond either partially or in full. In the Extra bond this premium risk is about 10% of the invested capital. The investor can also sell the index-linked bond before maturity. In normal market conditions Nordea quotes a secondary market price for the bond on all banking days when banks are generally open in Finland. The repurchase price may be above or below the bond’s nominal value.
Share basket
The share basket serving as the reference asset consists of the shares of ten international companies which produce luxury goods and in which Nordea sees long-term potential. All companies in the share basket have equal weights (10%).
The table below lists the recommendations by Standard and Poor's on the companies selected in the share basket. For more information on the companies in the share basket and their outlook, see pages x - y.
| Company | Country | Recommendation* | |
|---|---|---|---|
| 1 | Barrick Gold Co. | USA | Buy |
| 2 | BMW AG | Germany | Strong Buy |
| 3 | Coach Inc | USA | Strong Buy |
| 4 | Daimler AG | Germany | Hold |
| 5 | LVMH SA | France | Strong Buy |
| 6 | Polo Ralph Lauren Co. | USA | Strong Buy |
| 7 | PPR S.A. | France | Hold |
| 8 | Richemont SA | Switzerland | Buy |
| 9 | Swatch Group AG | Switzerland | Strong Buy |
| 10 | VF Corporation | USA | Strong Buy |
* Standard & Poors stock recommendations (January 2011).
Performance of the share basket and global equity markets during Dec 2005–Dec 2010
Starting level indexed at 100%. Source: Bloomberg.
The presented figures describe previous yield or value performance, and no reliable assumptions on future yield or value can be made based on them.
Yield calculation
The rise in the value of the share basket is calculated as the average of the rise in the value of the shares in the basket; however, the rise in the value of a single share is considered only up to 50%. The rise in the value of a share is calculated as the difference between its initial price and final price. The initial price is the closing price of the share on 1 March 2011. The final price is the closing price of the share on 10 February 2016. In the alternative Basic the positive change in value is multiplied by the participation rate 80% and in the alternative Extra by the participation rate 160%. If the value of the share basket falls or remains unchanged, no yield is paid. See the yield calculation examples below.
Example of yield calculation: Strong rise
| Share | Initial price | Final price | Change % | Change (%) according to loan terms |
|---|---|---|---|---|
| Share 1 | 100 | 220 | 120% | 50% |
| Share 2 | 100 | 200 | 100% | 50% |
| Share 3 | 100 | 170 | 70% | 50% |
| Share 4 | 100 | 165 | 65% | 50% |
| Share 5 | 100 | 160 | 60% | 50% |
| Share 6 | 100 | 155 | 55% | 50% |
| Share 7 | 100 | 150 | 50% | 50% |
| Share 8 | 100 | 140 | 40% | 40% |
| Share 9 | 100 | 125 | 25% | 25% |
| Share 10 | 100 | 80 | -20% | -20% |
| Share basket change on average = 57% |
Share basket change (%) according to loan terms = 40% |
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| Value at maturity | Share basket change x | Partcipation rate + | Return of capital = | Maturity value | Return, p.a. |
|---|---|---|---|---|---|
| Basic | 40% | 80% | 100% | 131.6% | 5.6% |
| Extra | 40% | 160% | 100% | 163.2% | 8.2%* |
Example of yield calculation: Moderate rise
| Share | Initial price | Final price | Change % | Change (%) according to loan terms |
|---|---|---|---|---|
| Share 1 | 100 | 150 | 50% | 50% |
| Share 2 | 100 | 145 | 45% | 45% |
| Share 3 | 100 | 140 | 40% | 40% |
| Share 4 | 100 | 135 | 35% | 35% |
| Share 5 | 100 | 130 | 30% | 30% |
| Share 6 | 100 | 125 | 25% | 25% |
| Share 7 | 100 | 120 | 20% | 20% |
| Share 8 | 100 | 120 | 20% | 20% |
| Share 9 | 100 | 110 | 10% | 10% |
| Share 10 | 100 | 90 | -10% | -10% |
| Share basket change on average = 27% |
Share basket change (%) according to loan terms = 27% |
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| Value at maturity | Share basket change x | Partcipation rate + | Return of capital = | Maturity value | Return, p.a. |
|---|---|---|---|---|---|
| Basic | 27% | 80% | 100% | 121.2% | 3.9% |
| Extra | 27% | 160% | 100% | 142.4% | 5.3%* |
Example of yield calculation: Decline
| Share | Initial price | Final price | Change % | Change (%) according to loan terms |
|---|---|---|---|---|
| Share 1 | 100 | 100 | 0% | 0% |
| Share 2 | 100 | 90 | -10% | -10% |
| Share 3 | 100 | 80 | -20% | -20% |
| Share 4 | 100 | 75 | -25% | -25% |
| Share 5 | 100 | 70 | -30% | -30% |
| Share 6 | 100 | 60 | -40% | -40% |
| Share 7 | 100 | 50 | -50% | -50% |
| Share 8 | 100 | 40 | -60% | -60% |
| Share 9 | 100 | 30 | -70% | -70% |
| Share 10 | 100 | 20 | -80% | -80% |
| Share basket change on average = -39% |
Share basket change (%) according to loan terms = -39% |
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| Value at maturity | Share basket change x | Partcipation rate + | Return of capital = | Maturity value | Return, p.a. |
|---|---|---|---|---|---|
| Basic | -39% | 80% | 100% | 100.0% | 0.0% |
| Extra | -39% | 160% | 100% | 100.0% | -1.9%* |
* The yield calculation includes the 10% premium. The annual yield is calculated according to the compound interest principle.
Historical yield
The average historical yield on the index-linked bond, had the investment been made in accordance with the issue terms in January 2003 through December 2005 (weekly observations), and the average five-year yield on a direct investment in the share basket in the same period. The investment would have matured January 2008–December 2010.
| Redemption amount on average | Annual yieldon average | |
|---|---|---|
| Basic | 122,9 % | 4,2 % |
| Extra | 145,7 % | 5,8 %* |
| Direct investment | 151,9 % | 8,7 % |
* The yield calculation includes the 10% premium. The annual yield is calculated according to the compound interest principle.
Issue terms in brief
| Issuer | Nordea Bank Finland Plc; credit ratings Aa2 (Moody’s) and AA- (Standard & Poor’s). | |||||||||||||||||||||||||||||||||
| Loan number and ISIN | Luxury Basic 4460A: FI4000020193 Luxury Extra 4460B: FI4000020201 |
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| Issue date | 17 January 2011 | |||||||||||||||||||||||||||||||||
| Maturity | 25 February 2016 | |||||||||||||||||||||||||||||||||
| Subscription period | 17 January–25 February 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 4460A: variable, about 100% Extra 4460B: variable, about 110% |
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| Minimum subscription | 1,000 euros | |||||||||||||||||||||||||||||||||
| Yield at maturity | Basic 4460A: 80% of the rise of the share basket in accordance with the terms of issue Extra 4460B: 160% of the rise of the share basket in accordance with the terms of issue |
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| Reference assets | The shares of the following companies serve as the reference assets (all together "share basket"):
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| Initial price | The closing values of the reference assets on 1 March 2011 | |||||||||||||||||||||||||||||||||
| Final price | The closing values of the reference assets on 10 February 2016 | |||||||||||||||||||||||||||||||||
| Yield calculation | The positive change in the price of one share is considered up to 50%. | |||||||||||||||||||||||||||||||||
| 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 reference asset basket. The bonds involve a risk of the issuer’s repayment ability and of losing the premium (in Extra bond about 10%). | |||||||||||||||||||||||||||||||||
| Security | The bonds are 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 4460A (Index-linked Bond Luxury Basic) and 4460B (Index-linked Bond Luxury 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.
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The luxury goods market is considered a very cyclical industry, and during the last ten years the cyclical turns have at times been very sharp. One of the explanations behind the cyclical sensitivity of the industry is the general notion concerning wealthy people who consume luxury products and their investments: the better the shape of their investment portfolios is, the more they buy fashion, valuable watches, champagne and cars. As a result of the financial crisis and economic recession, the luxury goods market shrank about 10 per cent in 2009.
In contrast, in 2010 the industry is forecast to grow about 10 per cent. The recovery of the industry is due to the brisk sales growth in Q2 and Q3 2010 in the US – the largest single luxury goods market – the growth of over 30 per cent in China and especially the strong sales figures of the leather, footwear and accessories. The significance of online sales for luxury goods producers is growing continuously, and last year this sales channel accounted for about 20 per cent of the surge in the luxury goods sales, which is more than the Internet sales growth in total.
The success of luxury goods is mainly explained by improved consumer confidence. The financial crisis made consumers more cautious than before, but the dip was shorter than feared. Admittedly, an unexpected weakening of the economic situation or an increased risk of recession would pose a serious threat to the industry. The shares of companies producing luxury goods are more sensitive to cyclical fluctuations than the average, which means that should the risk of recession increase and equity markets fall, the share prices of luxury goods companies would fall more than the equity markets on average. But during an upturn the rise is correspondingly faster.
Recent economic statistics speak in favour of continuing economic recovery, which further decreases the risk of a double dip. What is encouraging to the luxury goods industry is the improving consumer confidence and the positive sentiment in its largest market, the US. These are some of the reasons why we have raised the total growth forecast for 2011 in the US. In late 2010, retail sales growth in the US clearly exceeded expectations, and Christmas sales were expected to be stronger than last year.
From an investor's point of view, the attractiveness of luxury goods companies is further boosted by the growth story of the emerging markets. As the Chinese, Russians and Indians are becoming more affluent, they are spending more and more on luxury goods. In China, not even the financial crisis slowed down the growth of the industry: in 2009 it grew by 20 per cent and last year by over 30 per cent. In the next five years China is expected to become the third largest market for luxury goods after the US and Europe.
Sources: Nordea Economic Research, Bain & Company and The Economist
The reference asset basket of Index-linked Bond Luxury
The share basket of Index-linked Bond Luxury consists of ten shares. Below you will find Nordea's and Standard and Poor's views of the companies in the basket and of their future prospects.
Barrick Gold Co.
Barrick Gold Corporation is the world's leading gold and industrial metals company, with 26 mines located across five continents. In addition, the company has land positions on some of the world's most prolific mineral districts. The net sales of the company have grown steadily in the last few years, and we believe that this growth will continue mainly because of rising gold and copper prices. This – together with the company's strong financial position – will enable the company to participate in highly profitable international projects also in the future.
BMW AG
BMW is the world's leading premium car manufacturer with the focus of sales on the European and US markets. BMW is also well exposed to growth in the emerging markets. With the most solid balance sheet in the sector, BMW looks like a clear winner in the current competitive situation. In the car market, the trend has shifted from large, fuel-consuming cars to smaller and more economical models. Although BMW is known as the world’s leading premium car manufacturer, small cars generate about 30 per cent of its net sales. In addition, BMW is the leading manufacturer of low-emitting premium cars. We believe the premium car segment will grow in future and win market share from cheaper cars.
Coach Inc.
Coach is a US company which designs, manufactures and sells mainly leather goods. Coach's product offerings include handbags, business cases, luggage, women's and men's accessories, leatherwear and leather gloves. Together with its licensing partner, the company also offers watches, footwear, furniture and eyewear. The company's recent earnings outlook has been promising, and we believe that the expansion of retail sales especially to China provides room for growth also in future. In addition, the company's strategy to focus on offering luxury goods especially in Europe and in China lends support for their positive future outlook.
Daimler AG
Daimler is a German manufacturer of passenger cars and commercial vehicles and a provider of financial services. The company is renowned for top-class premium cars and its most important brands include Mercedes-Benz, Maybach and Smart. As 2009 was a challenging year to the company, there is room for growth and we believe that net sales will grow as much as 20 per cent in 2010, driven by the good result of Mercedes-Benz. The next few years also look promising. Demand for trucks, in particular, is strong in the developed markets of Europe and North America.
LVMH SA
LVMH (Moët Hennessy Louis Vuitton) is a French luxury goods company and in its industry the largest in the world in terms of net sales. LVMH owns more than 60 famous brands, some of the best-known being Moët & Chandon champagne, Hennessy cognac, Tag Heuer watches and the fashion brands Louis Vuitton, Donna Karan and Kenzo. In addition, the company is partly owned by the fashion house Christian Dior. The latest data reveals that the demand of products sold in wholesale, such as wines, watches and jewellery, is stronger than expected and gradually recovering also in the traditional markets in Europe and the US. Year after year, the high-margin brands of the company have fared better than expected in the competition and we believe that this trend will continue.
Polo Ralph Lauren Corp.
Polo Ralph Lauren is a US fashion house specialised in luxury fashion wear. The Polo brand was established in 1967 when the American fashion designer Ralph Lauren started to design clothes that represented classic style and luxury. For example, the Polo shirt, introduced in 1972, has become a timeless classic. During the years, the Polo brand range has expanded and besides clothes it now also includes footwear, accessories, fragrances, home textiles and utility articles. With the recovery of consumer demand, led by the emerging countries, and the retail sales picking up, we believe that the coming earnings seasons will bring good news.
PPR Group
PPR is a French retailer of consumer products, sports apparel, underwear and luxury goods. Over the years, the company has built an extensive and famed brand portfolio consisting of brands which appeal to investors and have good growth potential. The company's well-known brands include Gucci, Yves Saint Laurent, Bottega Veneta, Stella McCartney, Alexander McQueen and the sports apparel giant Puma. As demand is picking up, led by the emerging countries, the company has now even more strongly set its sights on China, where we believe the sales of luxury goods will grow significantly in the coming years. Gucci, for example, plans to double the number of its retail sale stores in China. We believe that the sales should start to pick up also in the US, where last year's challenging economic situation weighed on the company's result, but there have recently been promising signs of recovery.
Richemont
Richemont is a Swiss holding company which owns several of the world's leading companies in the field of luxury goods, with particular strengths in jewellery, luxury watches and premium accessories. The group owns about 20 brands, notably the French Cartier, the German Montblanc and the Italian Panerai. In terms of net sales, Richemont is the world's third largest luxury products group in its industry, right after LVMH and PPR. Like its competitors, Richemont's strategic direction is increasingly geared towards the emerging markets, where the demand of luxury products is expected to grow further as the population becomes more affluent. We believe that the company's strategic plans will support its strong performance also in the coming years.
Swatch Group AG
Swatch Group is a Swiss company which manufactures watches, watch components and jewellery. In terms of net sales, Swatch is the world's largest manufacturer of watches. The company owns almost 20 watch brands, including Calvin Klein, Omega, Swatch, Longines and Tissot. Swatch has recovered from the recession fast and its sales figures have already surpassed the peak levels of 2008. According to the most recent observations, the company's products are in demand not only by the rich but also by consumers valuing quality and luxury. Thus, the stage is set for a record year both in terms of sales figures and operating profit, and we believe that the positive trend will continue in the long term, too.
VF Corp
VF Corporation is a US company which manufactures and markets leisure apparel and equipment. The company owns 25 brands the best-known being Eastpak, Lee, Kipling, Vans and The North Face. Because of its wide and strong product portfolio, we believe that in the coming years the company will have numerous opportunities to grow its operations. We believe that the strong brands of the company, in particular Vans and The North Face, and the emerging markets led by Asia will be the next few years' growth drivers.