HSBC's $10.8 million notes linked to Asian currencies seen as protected bet for dollar bears

By Emma Trincal

New York, Dec. 9 - HSBC USA Inc.'s $10.8 million of 0% notes due Dec. 6, 2011 linked to the performance of four currencies relative to the U.S. dollar offer some principal protection as well as some attractive upside for investors if they correctly anticipate a bearish ride for the U.S. dollar, sources said.

The equally weighted underlying currencies are the Indian rupee, the Indonesian rupiah, the Korean won and the Singapore dollar, according to a 424B2 filing with the Securities and Exchange Commission.

The best-case scenario for investors is when the basket return is at least 3%. In such case, the payout at maturity will be 95% of par plus the greater of the basket return and 14.75%.

Otherwise, investors will receive 95% of par.

Unusual structure

"I haven't seen a structure like that before," said Tom Livingston, director of structured products at Halliday Financial Group. "But HSBC is pretty creative; they're pretty good."

He said that one aspect of the originality of the structure is the 95% principal protection. "It's not common," he noted.

"But it's mostly the idea that you could lose 5% even if the basket is up, in the case it's up by less than 3%," he said.

That outcome would not deter him from investing in the notes.

"You're only marginally losing. When you're getting that much upside, a 5% loss is a small price to pay.

"I would invest in this deal given the risk/reward metrics."

Dollar bears

The deal may also appeal to investors with a strong currency view.

"It's a straight bet against the dollar," said Steve Doucette, financial adviser at Proctor Financial.

"It makes sense if you're bullish on emerging-market currencies," said Win Thin, senior currency strategist at Brown Brothers Harriman & Co. "A 3% move can happen in one day with this asset class.

"I'm very positive on emerging markets, so to me, a 3% gain in one year is very doable."

He said that the Singapore dollar is up 7.2% year-to-date. "The rupee is up 3%, the Indonesian rupiah has gained 4.3%, and the Korean won is 2.2% higher," he said, quoting these currencies in relation to the U.S. dollar.

The average appreciation to date and based on those quotes is 4.17%.

"Those currencies are likely to strengthen against the dollar," said Livingston.

"The uncertainty is when people rush to the dollar in a flight to quality. But this wildcard is offset by heightened fear of inflation in Asia and the likelihood that those emerging markets countries will tighten, which as a result would lead their currencies to rise against the dollar."

Speculation, 5% at risk

Despite the 95% principal protection, some did not feel comfortable with the notes.

"You have 5% at risk if the basket return is less than 3%," Doucette said. "So you hope to finish at least 3% higher. If that happens, then you get this 14% kickback and that's great.

"But it's a short-term speculative bet. You are betting against the dollar, hoping that your return will be greater than 3%. And while you get this protection if your bet works against you, it's still like gambling. You hope to end on the right side of the coin."

HSBC Securities (USA) Inc. is the agent.

Fees are 1%.

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