HSBC's Dow-linked notes attractive, Barclays' new products unusual but easily understood, analyst says

By Kenneth Lim

Boston, Dec. 12 - HSBC USA Inc.'s equity buffer notes linked to the Dow Jones Industrial Average has a relatively generous buffer and attractive payout probabilities, said structured products analyst Suzi Hampson of Future Value Consultants.

Meanwhile, a number of unusual structures coming out of Barclays Bank plc are offering new twists on old wrappers, Hampson remarked.

HSBC links to Dow

HSBC plans to price zero-coupon equity buffer notes due June 29, 2010 linked to the Dow Jones Industrial Average.

Payout at maturity will be par plus double any gain on the index, up to a maximum return of 20% to 24%. The exact cap will be set at pricing. The payout will be par if the basket declines by 20% or less. Investors will lose 1% for every 1% the basket declines beyond 20%.

High scores

Future Value gave the HSBC product a high overall rating of 6.91 out of 10 to the product, given its relatively low risk score of 2.92. The firm assigns a maximum risk score of 10 to the riskiest products.

"It does have quite a high score," Hampson said. "If you look at the probability table, there's more than half probability that you get a 10% to 15% return."

Meanwhile, the risk of losing capital with the product is only about 23%, Hampson noted.

Although the risk is still higher than principal protected products, the HSBC notes came out better in the assessment partly because of its buffer of 20% to 24%, Hampson said.

"It has a 20% buffer, which is quite high for accelerated products," she said. "That will go some way toward lowering its riskmap score."

The product's overall rating was also helped by the potential to make up to 20% to 24% on the investment, Hampson added.

"If you didn't lose any capital, in a year and a half the return is 120%, which is pretty good," she said.

But the attractiveness of the product ultimately boils down to whether it matches the investor's market view, she said.

"It just comes down to your feelings on the index," Hampson said. "It's quite a standard product."

Barclays offers unusual structures

Hampson noted that some of new structures being offered from Barclays are unusual twists on better known products.

Over the past few weeks, Barclays has introduced products described as buffered participation reverse convertibles and as covered call notes.

The buffered participation reverse convertibles will pay par plus a certain percentage of the underlying gain plus a fixed supplemental return, subject to a cap, if the underlying ends above its initial level at maturity.

If the underlying declines by a buffer percentage or less, the payout will be par plus the fixed supplemental return. If the share price declines beyond the buffer, investors will receive par plus the fixed supplemental return minus 1% for every 1% that the share price declines beyond the buffer. In that case, Barclays can pay with the underlying shares instead of cash.

Barclays is offering buffered participation reverse convertible notes due June 30, 2009 linked to the common stock of Freeport-McMoRan Copper & Gold Inc. and to the common stock of SunPower Corp.

Both series have a fixed supplemental return of 2.5% and an upside participation rate of 1.5 times. The cap for the Freeport-McMoran notes will be set at 22% and at 31% for the SunPower notes.

"They call themselves buffered reverse convertibles, but it doesn't seem to resemble the usual reverse convertible," Hampson said.

"You're getting a 2.5% supplementary payment I guess, which is paid in six months if you think of it as the income portion of the product," she said. "2.5% is still attractive, but it's not like the returns on normal reverse convertibles."

The product is more like a buffered accelerated growth product with an extra 2.5% coupon, Hampson said.

"You could see it as a strike of 102.5," she said.

The covered call notes pay par plus a call premium percentage if the underlying stock price is above its initial level at maturity. If the underlying ends flat or below its initial level, investors will receive par plus the underlying return plus the call premium percentage.

Barclays offered call covered notes due Jan. 7, 2010 linked to the iShares S&P 500 index fund with a call premium percentage of 15.2% to 19.2%; to the iShares MSCI EAFE index fund with a call premium percentage of 16.8% to 20.8%; and to the iShares MSCI Emerging Markets index fund with a call premium percentage of 23.4% to 27.4%.

"I think it's more like a reverse convertible than the other one," Hampson said. "But it's got no barrier, and if it finishes below the initial level, then you get the coupon plus the index return."

The new structures offer twists on structures that are already familiar to the market, and are actually quite transparent and simple to understand in terms of the potential returns, she said.

"They're not necessarily complicated structures, just slightly tweaked versions of existing structures," Hampson said. "The names themselves are the complicated bits. If you just look at the components of the products it's not really complex. If you understand reverse convertibles you should be able to understand these."

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