Structurers, investors seek out financial sector, analyst says; Credit offers low barrier, access in offerings

By Kenneth Lim

Boston, April 4 - The financial sector may be a risky sector in today's markets, but it has been a popular underlying for structured products over the past week, said structured products analyst Suzi Hampson of Future Value Consultants.

"We've seen growth in products linked to it because of the increase in volatility in the financial sector, and that enables higher coupons and accelerated growth on more attractive terms," Hampson told Prospect News. "I guess that's why it's becoming more popular. Anything linked to the financial sector is able to offer more attractive terms due to increased volatility."

The Financial Select Sector SPDR fund, in particular, has been a hotbed of interest.

"We've seen a growing popularity of these SPDR Financial Select funds," Hampson said. "We've seen three in quick succession this week."

On Friday, Deutsche Bank AG, London Branch added to the mix with plans for cash-settled call warrants due April 26, 2010 linked to the outperformance of the fund over the S&P Index.

The warrants will be sold at $13.65 to $14.65 per warrant. If the Financial Select Sector SPDR fund outperforms the S&P 500, each warrant will be cash-settled upon expiry at $100 multiplied by the outperformance amount. If the Financial Select Sector SPDR fund underperforms or performs the same as the S&P 500, the cash settlement amount will be zero. That means the outperformance amount must be more than 13.65% to 14.65% for investors to get a positive return.

The price of the warrants will be determined at pricing.

The recent products linked to the sector have been bullish offerings, and some of them have accelerated participation on the upside.

"I guess the thought process behind it would be if an investor thought that they were at their lowest point and they were going to come back up, because of the accelerated growth structure, any small-to-moderate growth in the overall basket would get about two times return [for example]," Hampson said. "So I guess this is directed at someone who thinks it's either at the lowest point or near the lowest point in the next two years."

Because of the nature of the underlying, such products tend to be more risky than products linked to the S&P 500, for example. But the volatility in the underlying allows issuers to offer more than they can normally accommodate, Hampson said.

"They could come off as fairly risky, but they still score quite well on our rating," she said. "They have big coupons, and people who are invested in the sector find it's less risk investing in a fund or structured product than investing directly...The volatility of the stock or the fund enables the higher potential return, and you might assume that it's a higher risk product. On our risk map it does come out higher than those linked to S&P and other indexes."

Two types of structures have been more popular, Hampson noted.

"Reverse convertibles seem to be the most popular type, and accelerated growth seem to be second," she said.

Credit Suisse generous with barrier

Credit Suisse is offering a series of CertPLUS securities due Oct. 28, 2011 linked to the S&P 500 index that appears more attractive than most recent products, according to Future Value's analysis.

The 0% notes will pay par of $1,000 plus one to 1.1 times the underlying index return if the index ends above its initial level. If the index is flat or falls by up to 40% of the initial level, the payout will be par. If the index finishes below the barrier, investors will lose 1% for every 1% decline in the index.

The product is one of the least risky offerings among recently launched products, but also one of the more attractive in terms of overall value, according to Future Value's assessment. Two aspects of the Credit Suisse notes contributed to its attractiveness - the protection level and the unlimited upside, Hampson said.

"Usually accelerated growth products have a buffer of about 20%," she said. "This one has a barrier of 40%, which will have quite a bit of a factor in the risk analysis. You never see a buffer as low as 60%."

"On the return, the high return score is maybe because the participation is uncapped," she added. "So the growth is potentially higher, with 100% to 110% participation."

Credit Suisse ETNs offer access

Credit Suisse's recently launched Elements exchange-traded notes due April 10, 2023 linked to the Credit Suisse Global Warming Index, Exchange Series shows how structured products allow investors to gain exposure to sectors that would otherwise be difficult to access, Hampson said.

"This is an example of structured products being used as access to unusual underlyings," she said. "If an investor wants to invest in a global warming index they may find it expensive to do so. Using a tracker like an ETN is probably easier and makes it cheaper to invest in something like this."

Investors will gain 1% for every 1% increase in the underlying index less an annual fee of 0.75%.

The Elements will trade on NYSE Arca under the symbol GWO.

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