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Index-linked Bond Russia and Eastern Europe

Basic and Extra

Why invest in Index-linked Bond Russia and Eastern Europe?

Russia and Eastern Europea are emerging European economies, and their economic growth is expected to be faster than that of the Western European countries. The economic growth of Russia is accelerating due to the rise in raw material prices and the pick-up of investments and consumer consumption. The Russian economy is also getting a boost from the privatisation of state-owned companies and structural reforms of the economy.

The Eastern European countries are back on the growth track. In many of the region's economies households are the engines of growth, and the Eastern European countries benefit from their low salary costs and the proximity of the Western European markets. Accordingly, these countries have potential for attracting foreign investments and production.

After the equity markets of the evolving Eastern Europe opened up to foreign investors, the Russian and Eastern European equity markets have become favourites among institutional and private investors in the last few decades. The valuations of Russian equities are, however, still at low levels (PE ratio of the RDX Index is about 9), although earnings growth has been at the same level as in other countries. Political risks and the large presence of Russian energy companies in the index have kept the valuations low.

Index-linked Bond Russia and Eastern Europe offers an interesting way to invest in the equity markets of emerging Eastern Europe. It should be kept in mind that the flip side of the healthy return potential is the higher-than-average risk relating to the Russian and Eastern European equity markets. Consequently, an index-linked bond is a wise choice because the nominal capital of the investment is repaid at maturity irrespective of the share price performance.

Index-linked Bond Russia and Eastern Europe

Index-linked Bond Russia and Eastern Europe is a bond issued by Nordea Bank Finland Plc. Its maturity is approximately five years and its yield is based on the performance of the RDX, CECE Composit and SETX indices forming an index basket. The bond comes with two alternatives: Basic and Extra. The alternative Basic is suitable for a cautious investor. Its yield at maturity is 90% of the increase in the value of the index 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 165% of the rise in the value of the index basket in accordance with the terms of issue. Regardless of the index basket performance, Nordea repays the nominal capital of the bond at maturity.

The increase in the index basket value is the weighted average of the performances of the indices. The weight of the RDX Index is 50%, of CECE Composite Index 25% and of SETX Index 25%. The rise in the value of a reference asset is calculated as the difference between its initial price and final price. The initial price is the closing price of the reference asset on 27 April 2011. The final price is the average of the semi-annual closing values of the reference assets from 8 October 2011 to 8 April 2016. If the value of the index basket falls or remains unchanged, no yield is paid.

Risks of the investment

The index-linked bond involves the 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, for example, in the event of the issuer's bankruptcy. 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 exceeding the nominal value either partially or in full. In the Extra bond this premium risk is approximately 10%, as its subscription price is about 110%. The investor can also sell the bond 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.

Reference assets

The reference assets are three equity indices, which together form an index basket.

Russia (weight in the index basket 50%)
Russian Depository Index (Bloomberg):
The RDX index (Russian Depository Index) is a capitalisation-weighted equity index, which consists of the most traded depository receipts on the London Stock Exchange entitling to Russian shares. At the moment the reference index includes 15 companies. The largest sector is energy. Further information on the index is available on the Internet at www.en.indices.cc.

Poland, the Czech Republic and Hungary (weight in the index basket 25%)
CECE Composite Index
The CECE Composite Index is a capitalisation-weighted equity index, which consists of Polish, Czech and Hungarian shares. In March 2011 the weightings were Poland 65.8%, the Czech Republic 24.8% and Hungary 9.4%. The index is calculated and published by Wiener Börse. Further information on the index is available on the Internet at www.en.indices.cc.

Bulgaria, Croatia, Romania, Serbia and Slovenia (weight in the index basket 25%)
SETX Index (South-East Europe Traded index)
Slovenian and Croatian shares. In March 2011 the weightings were Romania 34.9%, Slovenia 31.8%, Croatia 27.9%, Serbia 4.1% and Bulgaria 1.26%. The index is calculated and published by Wiener Börse. Further information on the index is available on the Internet at www.en.indices.cc.

Performance of the RDX, CECE Composite and SETX indices, March 2006 - March 2011
Starting level indexed at 100%. The premium, if any, the averaging of the final price in accordance with the issue terms and the participation rates are not taken into account in calculating the index performance. The yields in accordance with the issue terms can deviate significantly from the index performance. Source: Bloomberg.

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

Yield table: Index-linked Bond Russia and Eastern Europe

Change of the index basket according to the terms of the issue	Russia and Eastern Europe Basic		Russia and Eastern Europe Extra
	Issue price ca.	100%	Issue price ca.	110%
	Participation rate	90%	Participation rate	165%
	Value at maturity	Return p.a.	Value at maturity	Return p.a.*
-50%	100%	0.0%	100%	-1.9%
-25%	100%	0.0%	100%	-1.9%
0%	100%	0.0%	100%	-1.9%
25%	123%	4.1%	141%	5.1%
50%	145%	7.7%	183%	10.7%
75%	168%	10.9%	224%	15.3%
100%	190%	13.7%	265%	19.2%

* A 10% premium has been taken into account in yield calculation.

Simulated historical yield

The historical value at maturity, had the investment been made in accordance with the issue terms in January 2001–February 2006, and the yield on a direct investment in the index basket. The investment would have matured January 2006–February 2011 (weekly observations). The yield on a direct investment has been calculated using one initial and closing value without averaging the final value.

	Redemption amount on average	Annual yield on average
Basic	181,9 %	12,7 %
Extra	250,1 %	17,9 %*
Direct investment	247,1 %	19,8 %

*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).
ISIN	Russia and Eastern Europe Basic 4496 A FI4000022290 Russia and Eastern Europe Extra 4496 B FI4000022298
Issue date	14 March 2011
Maturity	22 April 2016
Subscription period	14 March–21 April 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 4496A: variable, about 100% Extra 4496B: variable, about 110%
Minimum subscription	1,000 euros
Yield at maturity	Basic 4496A: 90% of the rise in the index basket value in accordance with the issue terms Extra 4496B: 165% of the rise in the index basket value in accordance with the issue terms
Reference asset	The following equity indices form the reference assets (together the 'index basket'): 50% RDX Index (Bloomberg: RDX Index) 25% CECE Composite Index (Bloomberg: CECEEUR Index) 25% SETX Index (Bloomberg: SETXEUR Index)
Initial price	The closing prices of the reference assets on 27 April 2011
Final price	Average of the reference assets' semi-annual closing prices from 8 October 2011 to 8 April 2016
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 bonds are unsecured.
Structuring cost	The subscription price includes a structuring cost of about 0.9% 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	Possible index-linked yield is subject to tax at source on interest income for natural persons and Finnish death estates.
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 l ow, or if something should occur that the issuer considers might endanger the issue.
Listing	An application will be made for the bonds to be listed on NASDAQ OMX Helsinki.

Loans 4496A (Index-linked Bond Russia and Eastern Europe Basic) and 4496B (Index-linked Bond Russia and Eastern Europe 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.

Market review - Brisk economic growth in emerging Europe

The Russian bear awakens

The Russian economy has grown at a rapid pace throughout the 2000s, with the exception of 2009. The growth drivers have been Russia’s massive energy resources and the structural reforms of the economy. In the latter half of 2010 the Russian economy grew less than expected, mainly due to the difficulties faced by the country's agricultural sector. This weakened consumer confidence and dampened consumption. Inflation is now higher than the credit and deposit interest rates, which in turn is giving a boost to consumption.

We believe that consumer confidence and consumption will recover when real wages rise and unemployment rates are low. Along with domestic consumption, investment is picking up at a fast pace and going forward they will be one of the crucial growth driver, because bank lending is expected to grow by more than 15% this year. The rising prices of raw materials, energy in particular, will also strengthen Russia's growth potential. According to Nordea's forecast, the growth rate in Russia will be over 5% in 2011 and 2012.

The Eastern European countries getting back to the growth track

With the enlargement of the European Union (EU), the Eastern European countries have become more important for the whole economy of Europe, and the EU market provides a good base for the growth of these countries. Poland, Hungary, the Czech Republic and one of the Balkan countries, Slovenia, joined the EU in 2004. Romania and Bulgaria became member states at the beginning of 2007. Croatia and Serbia have also applied for EU membership, and Croatia is expected to become a member in 2011.

Since they became EU members, the economic growth of many Eastern European countries has been especially robust, up to 2009. Cheap labour force has attracted foreign direct investments in the Eastern European countries and enabled strong and stable economic growth. The growth in exports that begun before EU membership created a basis for a self-feeding process where new jobs increase income, which in turn speeds up demand and creates new jobs. In Bulgaria, Poland, Romania and the Czech Republic, for example, the GDP growth rates were above 6%. In 2009 the global recession hit the Eastern European countries with full force, as they had taken sizeable foreign-currency-denominated loans to finance their fast growing economies.

In the largest country of the region, Poland, political risks have increased, but at the same time growth will remain strong: according to forecasts 3.8% in 2011 and 4.1% in 2012, supported by recovering investments and strong confidence in the country's economy. The growth rates of Hungary and the Czech Republic, too, are expected to stay above 3% in the next few years, due to an improved outlook for exports and the recovery of private consumption. Similarly, the growth outlook is positive for the Balkan countries (Bulgaria, Croatia, Serbia, Slovenia and Romania) – the IMF forecasts growth of over 3% on average in 2011 and 2012.

Sources: Nordea Economic Research, International Monetary Fund (IMF)