Issuers look to draw more investors away from CDs to structured notes, webinar panel says

By Sheri Kasprzak

New York, Sept. 18 - Structured notes might be worth a second look for investors who might otherwise stick with the perceived safety of a structured certificate of deposit, said a panel of structured products professionals on a webinar presented by S&P Dow Jones Indices.

The market has certainly grown, with $47 billion in U.S. structured note products sold in the past 12 months from 22 issuers across nine asset classes.

Investors are, more and more, abandoning protection for yield as non-principal protected notes rose substantially in the past year.

Investors who are typically interested in CDs, said Eric Miller, managing director with HSBC, are uncomfortable with substantial risk. Even so, given the current interest-rate environment, these investors might actually benefit from investing in structured notes, Miller said.

Investors may overpay

The advantage of a market-linked CD is that investors are protected by the FDIC.

"It's appealing to investors concerned about the market and about the credit of the issuer," said Miller.

"In our mind, we think that due to the fact that a lot of banks are flush with cash, they're not willing to pay as much for those deposits, so the funding levels banks can achieve with FDIC products is not that appealing. The risk [for structured notes] is not any greater than the risk you'd have with an FDIC-insured product. We believe that you may be overpaying for FDIC insurance in this market. A structured note may be better suited, not that you're taking more risk, but that you're overpaying."

In case of issuer bankruptcy, structured notes can feature principal protection, either total of partial.

Notes have shorter terms

Another advantage these notes might have over CDs is that they have relatively short terms, said Cary Immesoete, managing director with Wells Fargo.

"With market-linked notes, those periods are relatively short, a few years as opposed to an ETN, which is 30 years," said Immesoete.

"Market-linked notes have terms from 12 months to as long as 5 to 6 years, or a little longer. The terms are created, the exposure is created, and that exposure may include a measure of principal protection, reflective of opportunity in the market given the conditions at the time of issuance. The subscription period is fixed and locked down. We'll create a product for maybe the next month that reflects the market conditions during that time."

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