Financial sector receiving closer attention; SPDR fund gains interest; Barclays links to several banks

By Kenneth Lim

Boston, March 6 - Products linked to the financial sector are getting a closer look as recent weakness and volatility stir up opportunities for those willing to take a view, a structurer said.

Financial stocks took a beating on Thursday as worries about the credit and real estate markets hit the headlines. Yet this week has seen a number of products linked to the financial sector.

"We're seeing these products because that's the topic of the moment," the structurer said. "Financial stocks have been in the headlines for the past several months, and what that means is there's a lot of volatility in the sector now, which means there's opportunities whichever view you take."

"If you think that all the bad news has pretty much been priced in, that the recent declines are near a bottom, then there are reverse convertibles and accelerated return notes that you can invest in," the structurer said. "If you think things are going to get worse, there are products that offer exposure to short strategies. And there are also more nuanced products like outperformance notes, where you can take a long-short strategy. There are many ways to make money."

The structurer said it was hard to tell how Thursday's sharp declines will affect the types of products being offered and what products investors will be interested in.

"It really depends on each investor's view on where the markets are heading," the structurer said. "I'd say that in times of uncertainty, certain features such as principal protection, barriers, buffers, would be more important for investors."

SPDR fund sees interest

Some of the recent financial sector-linked offerings include Wells Fargo & Co.'s proposed 0% enhanced participation securities with partial principal protection due April 2011 linked to the Financial Select Sector SPDR fund.

Those notes will pay par plus double any increase in the fund's share price, subject to a maximum return that will be set between 50% and 60%. Investors will receive par if the share price declines by 15% or less and will lose 1% for each 1% decline beyond 15%.

Deutsche Bank AG, London Branch will also link a series of 0% Buffered Underlying Securities (BUyS) due Sept. 28, 2009 linked to the Financial Select Sector SPDR fund.

The payout at maturity will be par plus 150% of any index gain, subject to a maximum return that is expected to be 21.5% to 25.5%. Investors will receive par if the index declines by 15% or less and will lose 1% for each 1% decline beyond 15%.

Also linking to the Financial Select Sector SPDR fund will be Lehman Brothers Holdings Inc.'s two-year 0% buffered return enhanced notes.

The notes will pay par plus double any gain in the fund, capped at a payment of 43% to 47% of par. If the shares fall by up to 20%, the payout will be par. Investors will lose 1.25% for each 1% decline beyond 20%.

Not to be left out, Eksportfinans ASA is planning 0% callable access securities with buffered downside due April 5, 2013 linked to the fund via agent Wachovia Capital Markets, LLC.

Eksportfinans will have the right to call the notes on quarterly call dates beginning in October 2010. The redemption price on the first call date will be 152.5% to 162.5% of par. On each subsequent call date, the redemption price will be increased by 5.25% to 6.25%.

If the fund price increases, the payout at maturity will be par of $10 plus the gain in the fund. If the fund price declines by up to 20%, the payout will be par. Investors will lose 1.25% for each 1% that the fund declines beyond 20%.

Barclays links to banks

Barclays Bank plc, meanwhile, launched a number of reverse convertibles tied to individual bank stocks.

In filings with the Securities and Exchange Commission, Barclays said it will offer 15% reverse convertible notes due Sept. 30, 2008 linked to the common stock of Lehman Brothers Holdings Inc. with a knock-in level at 60% of the initial share price.

Its 10% reverse convertibles due March 30, 2009 linked to the common stock of Bank of America Corp. will have a knock-in level at 60% of the initial share price.

Its reverse convertibles due March 30, 2009 linked to Citigroup Inc. common stock will have a coupon of 11% and a knock-in level of 60%.

A series of reverse convertibles due March 30, 2009 will be linked to Goldman Sachs Group Inc. common stock, have a coupon of 10% and a knock-in level at 70% of the initial share price.

Barclays's 11% reverse convertible notes due March 30, 2009 are linked to the common stock of JPMorgan Chase & Co. with a knock-in level at 60% of the initial share price.

Its 11% reverse convertible due March 30, 2009 is linked to Merrill Lynch common stock and will have a 60% knock-in level.

Finally, a 9.75% reverse convertible due March 30, 2009 will be linked to the common stock of Morgan Stanley and have a knock-in level at 60%.

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