HSBC, Harris offer CDs linked to CMS spreads; investors appreciate long-term security, distributor says

By Kenneth Lim

Boston, Sept. 2 - HSBC Bank USA, NA and Harris NA announced leveraged curve steepener certificates of deposit on Tuesday, adding to the growing market for the structure.

"I think CDs work especially well for these long-term products where the investor tends to be more exposed to the credit risk of the issuer," a distributor said.

HSBC plans to price callable leveraged steepener CDs due Sept. 12, 2023 linked to the spread between the 10-year constant maturity swap rate and the two-year CMS rate.

The product will pay a 10% coupon in the first year. After that the coupon will be the greater of 0% and 10 times the underlying spread, subject to a cap of 15%.

At maturity, investors will receive par.

The CDs may be called quarterly beginning in September 2009.

Harris also launched callable leveraged curve steepener CDs, its offering due Sept. 18, 2023 and linked to the spread between the 30-year CMS rate and the two-year CMS rate.

The Harris CDs will pay an 8% coupon in the first year. Subsequently the coupon will be the greater of 0% and eight times the underlying spread, subject to a cap of 15%.

At maturity, investors will receive par.

The Harris CDs may be called quarterly beginning September 2009.

Rate CDs popular

The distributor said CDs that are linked to interest rates have been popular with investors.

"They've been selling well, and you can tell because the banks are now offering them regularly," the distributor said. "If nobody wants them, the banks wouldn't bother."

The CD structure is especially attractive for interest rate products, which tend to have longer maturities than those linked to equities, the distributor said.

"One of the key differences between a CD and a note is that with the CD your capital is not exposed to the credit of the issuer, which means that if the bank that sold you the CD goes bust, you'll still get your principal back because it's been insured with the FDIC," the distributor said.

"If you're looking at a reverse convertible, which often has a maturity of about six months to about a year, then the risk of the issuer defaulting usually isn't that big of a deal. But if you're holding a product that only expires in 15 years, you'll be a lot more concerned about whether the issuer will default in that time. So obviously in this case, the protection that the CD offers is worth a lot more."

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