Absolute return, autocallables attract interest as investors seek defensive, high-yielding investments

By Kenneth Lim

Boston, April 14 - Issuers are paying more attention to absolute return and autocallable structures in today's market as investors seek more defensive investments and higher yield, a structurer said.

"Worst-of and reverse convertibles have gotten hit pretty hard," the structurer said. "I think issuers are generally looking to other yield-oriented structures."

HSBC USA Inc. on Monday launched a series of zero-coupon autocallable notes with contingent protection due Oct. 26, 2009 linked to the S&P 500 Financials index.

The notes may be called quarterly beginning July 21, 2008 at an annualized return of 23% to 27% if the underlying index closes at or above the starting level on any observation date. The return amount will be determined at pricing.

If the notes are not called and the index finishes below the trigger of 55% of the initial level, investors will lose 1% of their principal for every 1% decline in the index. Otherwise the payout at maturity will be par.

"The notes are designed for investors who want to express a bullish view of the U.S. financial services sector through an investment linked to the S&P 500 Financials index," HSBC wrote in a product prospectus.

The structurer said autocallables appeal to investors who are looking to enhance the yield on their investments, and issuers are looking to expand the market for these products.

"That's a yield play that actually I think will be more developed over the course of the year," the structurer said. "And I think that can help people who are looking for yield."

Goldman Sachs & Co. had a series of 11- to 12-month 0% absolute return trigger notes linked to the S&P 500 index.

At maturity, the notes will pay 1% for every 1% increase or decrease in the level of the underlying index so long as the index remains between 84% to 88% of the initial level and 112% to 116% of the initial level during the life of the notes. Otherwise the payout at maturity will be par of $1,000.

"For folks who have some cash on the sidelines, absolute return is a great strategy for investors who are hoping to make money when the equity markets are not doing well," the structurer said. "The fact that you can get a profit on both the upside and downside and have principal protection appeal to these investors."

But the structurer stressed that autocallables and absolute return notes target different investors, mostly because of the two, only absolute return notes have principal protection.

"Autocallables are for people who are looking for yields and looking for big returns in return for principal protection," the structurer said. "That's the big difference between autocallables and absolute returns, it's principal protected."

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