HSBC links optimization notes to S&P 500; fingers crossed, but low hopes for November, distributor says

By Kenneth Lim

Boston, Nov. 4 - Clues about the size of November's issuance volume will likely emerge closer to the middle of the month, but structured products sellsiders do not expect a big recovery so soon, a structured product distributor said.

"I think it's going to be tough," the distributor said.

With the new November calendar offerings still hot from the oven, distributors and issuers still cannot predict how the month and the rest of the year will perform, the distributor said.

October saw one of the biggest slowdowns in issuance among U.S. structured products, with the $2.437 billion of structured products representing a year-on-year drop of about two-thirds, according to preliminary data compiled by Prospect News.

"I think it's still too early to tell," the distributor said. "The November calendars were just launched, so we probably won't start to see the numbers until the second week or so. I think all our fingers are crossed, everyone's hoping for the best, but honestly I don't think anyone's getting their hopes up too high. You might see a bit of an improvement from October as some confidence returns to the credit markets and investors feel more comfortable parting with their cash, but I don't think we'll see the same kind of numbers as at the start of the year or the same time last year."

One strategy has been to offer more products wrapped in certificates of deposit, which have experienced some success, the distributor said.

"There's definitely more attention being focused on CDs," the distributor said. "CDs have two things going for them right now. One is the lack of appetite for risk, and the other is the higher limit on FDIC insurance from $100,000 to $250,000. The problem with CDs is, with the current volatility in so many markets, because they're principal protected, they're very expensive to offer, and the yields you're getting on them aren't very exciting. You see interest now because there's nothing else out there that looks attractive either because those yields are too low or they're too risky, but when the market picks up you might see some of that interest fade away."

But the distributor expects that structured product issuance will bounce back quickly when the markets begin to recover.

"I think so," the distributor said. "Everyone's hungry for yield right now. The only thing which is holding them back is uncertainty. Once that uncertainty is gone, which is to say when the credit markets are unfrozen and people can get back to business as usual, even if the economy is slower, people will rush to the investments that they wanted."

HSBC links to S&P 500

HSBC USA Inc. launched an unusual Free Writing Prospectus that offered one series of 1.5-year return optimization securities linked to the S&P 500 index for every trading day until Nov. 21.

UBS Financial Services Inc. is the agent.

Except for the dates, the notes all have the same structure. At maturity, investors will receive par plus five times any gain in the underlying index, subject to a maximum total payout of 135% to 140% of the principal. If the index is zero, investors will receive par. If the index ends lower, investors will lose 1% of their principal for every 1% decline in the index.

The payout cap will be set at pricing.

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