Harris plans outperformance CDs; Ricketts calls CARs 'next generation' of reverse convertibles

By Sheri Kasprzak

New York, April 26 - Harris NA announced plans on Thursday to price an offering of zero-coupon principal-protected outperformance certificates of deposit linked to the performance of the S&P 100 index over the Russell 2000 index.

"What we view as unique is the approach we took in creating them," said one source close to the offering. "The way we approached creating them was to take one of the views that the Harris private bank in the U.S. had of the expectation that the S&P 100 was going to outperform the Russell 2000 in an interim period of time."

The source noted that the expectation is based on research of past performance.

"When you look historically, we're in a period right now where the S&P 100 is in a position to outperform the Russell 2000," he said. "There was a period in time when the Russell 2000 was in a position to outperform the S&P 100. It's an opportunity for individuals to capitalize on an investment thesis rather than on stock performance."

CD terms

The four-year notes are set to price May 25 and pay par plus 170% of the spread of the S&P 100 index return over the Russell 2000 return if the S&P 100 outperforms the Russell 2000 index.

Otherwise, payout at maturity will be par. The payout will be subject to a maximum return that will be determined at pricing.

Incapital is the distributor for the offering.

Incapital's CARs

Speaking of Incapital, the distributor recently came out with a new structured called CARs, previously featured in the Prospect News Structured Products Daily.

Incapital's chief executive officer Tom Ricketts said in an interview that CARs, which are a type of certificate of deposit, complete with FDIC protection, provide a high return for investors seeking yield.

Ricketts compared the CARs to reverse convertibles with downside protection.

Ricketts pointed to a current offering Incapital plans to price linked to the stock of Apple, Inc.

"If you feel Apple is going to trade in a range for a while, it's a 30% coupon if the stock stays within that range," he noted. "If it leaves the range, you still get your principal back [at maturity]."

"There is a huge market for reverse convertibles," Ricketts went on to say in the interview. "We think of this as the next generation."

Other underlying stocks in the initial group of CARs include Microsoft Corp.; eBay, Inc.; Ford Corp.; JetBlue Airways, Inc. and SanDisk Corp.

The contingent coupon is paid as long as the reference stock remains within a specified range during the life of the CD. For the Microsoft deal, the range is plus or minus 9% from the initial level, for eBay plus or minus 13%, for Apple plus or minus 15%, for Ford plus or minus 17.5%, for JetBlue plus or minus 19% and for SanDisk plus or minus 18%.

The Microsoft CDs will have a contingent coupon of 18%, the eBay CDs a 26% coupon, the Apple CDs a 30% coupon, the Ford CDs a 35% coupon, the JetBlue CDs a 38% coupon and the SanDisk CDs a 36% coupon.

Incapital also plans to price an index-linked CD linked to the Nasdaq 100 index and the index will have a contingent coupon of 18%. The range for the index is plus or minus 9%.

Citigroup prices currency-linked notes

Moving to the popular currency-linked notes, Citigroup Funding Inc. recently priced $28 million in zero-coupon principal-protected notes linked to two currency baskets.

Basket A includes equal weights of the Brazilian real, the Indian rupee, the South American rand and the Turkish lira and basket B includes equal weights of the Swiss franc, the Japanese yen and the Czech koruna.

Payout on the 18-month notes will be determined based upon the performance of the currencies against the U.S. dollar.

If the currency basket A return minus the currency basket B return is greater than the trigger percentage of 24%, the payout will be par plus the spread of the currency basket A return over the currency basket B return.

If the currency basket A return minus the currency basket B return is greater than zero but less than or equal to the trigger percentage, the payout will be par plus the trigger percentage.

If the currency basket A return minus the currency basket B return is less than zero, the payout will be par.

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