HSBC ties accelerated notes to financials; sector returning to spotlight as uncertainty fades, distributor says

By Kenneth Lim

Boston, July 21 - The financial sector was back in play on Monday as HSBC USA Inc. launched a series of buffered accelerated notes linked to the industry.

"Interest is definitely high in the financial sector," a structured product distributor said. "A lot of that right now is because volatility is high in the sector and there's a lot of speculation about whether the sector is bottoming."

HSBC links to Financial Select Sector

HSBC plans to price zero-coupon buffered enhanced notes due Sept. 30, 2009 linked to the Financial Select Sector SPDR fund.

At maturity, if the underlying fund ends above its initial value, investors will receive par of $1,000 plus triple any gain on the index, capped at a maximum total payout of between 24% and 27% of the principal. The cap will be set at pricing.

If the fund is flat or declines by up to 10% at maturity, investors will receive par. If the fund falls by more than 10%, investors will lose 1% for every 1% that the fund declines beyond 10%.

Notes fit moderately bullish view

The notes will appeal to investors who are slightly optimistic about the financial sector, the distributor said.

"Investors who think the underlying fund will end at a higher level at maturity," the distributor said. "Because the gain is capped, investors shouldn't be expecting the fund to go up by more than 24% to 27%. But because it's an enhanced structure, investors will stand to get an attractive return if the fund goes up by just a little. At the same time, investors have a little bit of a buffer on the downside, so that they don't lose anything if the fund falls by up to 10%, so there's that little bit of a cushion on the downside."

Financials still getting attention

The distributor said investors remain highly interested in products linked to the financial sector.

"Whenever volatility is high in a particular sector, you'll tend to see more interest because the products become more interesting," the distributor said. "The issuers can put more attractive terms on those notes. Reverse convertibles have higher coupons, participation rates go up, barriers go down."

Products linked to the financial sector may have been placed on the backburner the past couple of weeks because of uncertainty in the stock markets about banks, the distributor said.

"I think there may have been a bit more caution with investors," the distributor said. "I think when IndyMac happened there was a bit of uncertainty about how all the other banks were going to be affected. When you're not sure about where the market is going, you're less likely to want to put your money down on that sector."

But the distributor said some of the grayness may be dissipating.

"I think there's been a bit more of a direction the past four or five days," the distributor said. "I think you'll continue to see a number of products linked to financials."

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