HSBC's access notes linked to green index indicate continued trend toward Earth-friendly indexes

By Sheri Kasprzak

New York, Jan. 28 - HSBC USA, Inc. is gearing up to price zero-coupon access notes linked to its proprietary Investable Low Carbon Energy Production Total Return index, a product one market source said is just one of several green indexes in a trend toward environmentally friendly companies.

"Some investors are really interested in companies that are involved, in some way, with greener ways of producing energy or just different environmentally friendly companies in general," said one source not connected to the offering.

"I have seen a number of these types of indices, so I think it's a big indication that investors are looking out for something like this."

When asked if he had heard of any banks coming up with their own proprietary, green indexes, the market source said he hadn't heard of any specifically, but added, "I think it would be silly to ignore the interest."

Terms of notes

The most recent offering of environmentally friendly notes from HSBC pays a cash amount equal to the product of par times the index return minus an annual fee, assuming the amount is not less than zero, according to a free-writing prospectus filed Monday with the Securities and Exchange Commission.

The annual fee is equal to 1.50% divided by 365 multiplied by the investment amount multiplied by the index return.

The four-year notes are not principal protected.

The investors may exchange their notes for a cash payment equal to the cash settlement value determined on the applicable valuation date, or the third business day before the exchange.

Similar offerings

HSBC previously said it will price zero-coupon performance-tracking securities linked to its Investable Climate Change Total Return Index. Those notes are set to price Feb. 26.

In November, HSBC priced $5 million in notes linked to its proprietary Investable Climate Change index, which includes up to 50 liquid stocks with revenue derived substantially from producing emissions-reducing technologies or other technologies aimed at reducing pollution.

Earlier this month, Eksportfinans ASA announced plans to price 26.5% reverse convertibles linked to a basket of four renewable energy stocks through Natixis Securities North America Inc.

In May of last year, the European Investment Bank announced its plans to issue a euro-denominated, zero-coupon bond linked to the new FTSE4Good Environmental Leaders Europe 40 index. The bonds have a minimum yield of 5% at maturity.

And last May, ABN Amro Bank NV priced zero-coupon principal-protected notes linked to the stocks of 10 environmental or renewable energy companies.

Reverse convertibles losing luster?

As the stock market tumbles, reverse convertibles are becoming a riskier investment, one market source said Monday, and the current market environment may make principal-protected offerings that much more appealing.

"It is very possible for some of these [reverse convertibles] to hit their triggers," said the insider.

"There's no principal protection, so there's the potential for a very hard fall. I would suggest that there is a market opening up now for principal protection. I think investors are going to start backing away a little bit from reverse convertibles. It's getting too risky."

Even so, another market source said reverse convertibles are still an attractive investment strategy - provided the investors realize the risk involved.

"Investors may proceed with caution," he said when asked about whether investors may move away from the structure.

"I don't think it's a bad strategy at all to look at reverse convertibles, even now, as income-producing vehicles. I think a lot depends on the underlyer."

Even so, the insider did note that movements in the broader stock market are something to look at - over a longer range.

Barclays plans ETNs

In other notes linked to proprietary indexes, Barclays Bank plc said Monday it intends to price zero-coupon exchange-traded notes linked to its Intelligent Carry index, a filing with the SEC said.

The notes pay par times the closing index performance, minus the investor fee, which is 0.65% annually.

The index reflects the total return of an "intelligent carry strategy," which seeks to capture returns that are potentially available from investing in high-yielding currencies with exposure financed by borrowings in low-yielding currencies.

The G10 currencies include the U.S. dollar, euro, Japanese yen, Canadian dollar, Swiss franc, British pound, Australian dollar, New Zealand dollar, Norwegian krone and Swedish krona.

The notes are redeemable three days after any valuation date between 2008 and 2038, subject to a minimum of 50,000 securities.

Morgan Stanley prices currency-linked notes

Elsewhere on Monday, Morgan Stanley priced $24.86 million in capital-protected currency income notes linked to nine currencies.

The notes are linked to the Australian dollar, British pound, Canadian dollar, euro, Japanese yen, New Zealand dollar, Norwegian krone, Swedish krona and Swiss franc, all versus the U.S. dollar.

The notes pay par plus the protection amount, which may initially be $90 and may be increased or decreased on each subsequent determination date, according to an SEC filing from Monday. The initial determination date will be Jan. 29.

There is a maximum monthly payment on the notes of $8.33, equal to an annualized return of 10%.

Deutsche Bank's call warrants

In other currency-related offerings, Deutsche Bank AG, London Branch said Monday it plans to price call warrants linked to the appreciation of four Asian currencies against the euro.

The two-year warrants are linked to equal weights of the Taiwanese dollar, the Indonesian rupiah, the Indian rupee and the Malaysian ringgit.

The notes pay the notional amount - $200 to $222 per warrant, to be determined at pricing - times the basket performance, if the basket performance is positive.

If the basket performance is equal to or less than zero, investors will receive nothing at maturity. The basket performance must be greater than the warrant premium percentage amount, which is 4.5% to 5% of the notional amount, in order to receive a cash settlement amount greater than the issue price. If the basket performance is positive, but less than the warrant premium percentage, the investors lost a portion of the investment.

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