HSBC offers principal-protected BRIC notes; currency products show health, distributor says

By Kenneth Lim

Boston, July 22 - Structured products linked to currencies remain a reliable market segment, a structured products distributor said.

The latest to hit the shelf is HSBC USA Inc.'s planned zero-coupon principal-protected notes due July 29, 2011 linked to a basket of BRIC currencies.

The basket comprises equal weights of the Brazilian real, the Russian ruble, the Indian rupee and the Chinese renminbi. The basket level increases if the currencies appreciate versus the U.S. dollar.

At maturity, investors will receive par plus at least 2.9 times any gain in the basket, subject to a basket return cap of 15%. That means investors will have a maximum total payout of $1,385 per $1,000 note if the participation rate is set at 290%.

The exact participation rate will be set at pricing.

Investors will receive at least par.

Steady currencies

Currency-linked structured products have been a consistent sales generator for structured products because of their ability to fill a niche in the investment universe, the distributor said.

"They allow the investor to gain access to an asset class which would otherwise be difficult to access," the distributor said.

"Emerging currencies are a very good example of this, because if you want to gain exposure to the Indian rupee, for example, you might not want to actually go out and buy rupees, because there's inconvenience and risk involved in doing that. A lot of investors who want exposure to these emerging currencies don't actually want to own those currencies, they just want exposure to the exchange rates."

Currency products have also benefited from investors who want to diversify their portfolios away from more traditional asset classes.

"Diversification is always a factor when you're talking about alternative asset classes like commodities, gold, FX," the distributor said. "I think people are taking a closer look at their portfolios and looking for hedges in many different areas, including asset classes."

Protection matters

Many of the currency-linked products that have been sold are principal protected or partially principal protected, the distributor said.

"The willingness to take on risk has shrunk tremendously in the market," the distributor said. "Investors want FDIC insurance if they can get it. If they can't, they want full principal protection. If they can't get that, they want at least partial principal protection."

The ability of issuers to offer protection in their currency-linked products has helped the segment remain robust, the distributor said.

"It's not just that investors want it," the distributor said. "Issuers have also figured out how to offer it and keep the terms attractive enough to sell. I think that's something you can't discount."

"When the market's not doing well, a lot of people want principal protection, although that might be prohibitively expensive to offer," the distributor said. "So it's to the issuers' credit that they've been able to continue creating attractive products that gives investors what they want."

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