Total issuance of retail structured products in the Asia-Pacific region excluding Japan rose from $22 billion in 2003 to $30 billion in 2004, with Hong Kong as the main driving force, according to a report by BNP Paribas. Short-tenor equity-linked notes are just some of the structured investments that have flooded the territory in the past six months, and while some observers now harbour doubts about the market's future growth potential, Credit Suisse First Boston (CSFB) believes opportunities still exist.
Adam Cowperthwaite, Hong Kong-based director of equity derivatives at CSFB, says his team has been working on alternatives to the popular equity-linked notes. These short-term notes usually pay fixed coupons, have a low strike price and early-redemption features, and are linked to a basket of Hong Kong stocks.
"Short-term note investors are looking for absolute returns on their investment and are mildly bullish to neutral on equities," Cowperthwaite says. And although the equity market has performed well in the territory, there is still a demand for structured notes. "Since each investor group has different objectives, and not all would be happy buying cash equity, there continues to be demand for a range of different structures - both capital-guaranteed and capital-at-risk," he says.
Bank Star, for example, is an offering that is aimed at relatively sophisticated investors with an interest in longer-maturity investments. Launched in September, it is a single-stock, 100% capital-guaranteed structured note and is the first of its kind in the Hong Kong market according to Cowperthwaite. The investment is linked to HSBC Holding shares and pays a fixed coupon of 5% in its first and second year.
Bank Star can be redeemed by the issuer on any one of the six semi-annual call dates at 100% of the security denomination plus a bonus coupon of 10% of the security denomination. If the issuer does not exercise its call option, investors will receive the fixed coupons and, upon maturity, the capital and the growth of the HSBC shares exceeding 110% of the strike price. Bank Star has a minimum tenor of six months and a maximum tenor of 4.9 years.
"Bank Star is an attractive combination of a callable structure, a yield-enhancement structure and the potential for meaningful equity growth through a long call option. It makes a lot of sense to include the long call option because investors are buying the volatility at near-record low levels," Cowperthwaite says. "The product was designed to provide the opportunity for enhanced yield in the near term, or a 'second-chance' in the medium term, in the form of a potential capital gain if the performance of the underlying shares is insufficient in the near term. This is a clear improvement over standard trigger redeemable structures."
But a structure such as this is initially harder to sell to clients. Compared with a target redemption, which detracts the value of a structure, a callable feature adds value. But in practice it is easier to explain target redemption than the callable feature, Cowperthwaite notes.
Structured notes such as Bank Star are marketed under the CSFB brand. And, importantly, the investment bank has its own retail distribution platform, CSFB iPAL. Media campaigns were employed heavily in the past to publicise the iPAL brand, but Cowperthwaite is unconvinced that advertising is as effective as it sometimes claims.
"Expensive marketing campaigns are less effective in selling a product than maximising the value in the products offered," Cowperthwaite says. "It's best to target products at investors who have previously had a positive experience of buying CSFB iPAL products. This approach has earned us strong support from distributors and frequent repeat business."
CSFB has used its relationship with key retail distributors and private banks to expand the iPAL investor base through syndicated private placements and retail launches. However, unlike other investment banks, CSFB does not use the largest distribution syndicate available.
"We prefer a smaller group, with whom we can spend more time developing products and training their staff. The products that we provide always offer something new to the market. We receive numerous comments to this effect, and it is the reason why we enjoy frequent repeat business with our preferred distributors," Cowperthwaite says.
What's more, CSFB iPAL is to launch its first credit-linked structure in January next year. "This will be a first-to-default (FTD) note sold to the Hong Kong retail market," Cowperthwaite says, adding that the CSFB iPAL brand has gained strong recognition in the territory because of frequent offerings. The investment bank has expanded the iPAL platform to permit the issuance of investment products in Taiwan, Singapore and Australia.
Cited in the aforementioned BNP Paribas report as one of the structured products heavyweights in Asia-Pacific excluding Japan, CSFB issued 12 retail notes in Hong Kong between June 2004 and October 2005. "It is always nice to follow successful launches with a re-run, but it is imperative that we consider where the market is heading next," Cowperthwaite says.
And he adds that innovation alone isn't enough. The product development process has to be fast. "All our sales representatives have our most exotic structures at their fingertips. Several of us were structurers before moving to sales, which allows us to respond very quickly to client requests, especially in the crucial development stage when clients really appreciate being able to work through various structure iterations on the phone."
Cowperthwaite says the emphasis on education has allowed CSFB to improve its offerings, and it also helps distributors with marketing and brand management. "We have found that the key to successful marketing lies in educating the 'ground staff' at the distributors. We spend a significant amount of time for each issue visiting distributors so that the sales people are comfortable explaining the structure to retail investors," he says.
CSFB also runs seminars for clients every six months to keep them up-to-date with new products and structures. The bank offers its private banking clients a range of exotic hybrids linked to commodities, hedge funds and other asset classes.
In an attempt to improve client service, CSFB is rolling out a proprietary secondary market tool to give clients real-time access to two-way prices, third-party issued securities and over-the-counter deals.
The web-based tool, called SecNet, is currently being rolled out to Asian clients. SecNet provides direct access to account holdings and transaction history. It has the potential for 24-hour trading and at the same time provides real-time live pricing, historical prices for securities, a database of securities and programme documentation.
While Hong Kong's short-term retail note market is undoubtedly becoming more competitive, the rest of the Asia-Pacific region is catching up. "The Taiwanese market has recently been driven towards shorter tenor structures. We are developing short-maturity structures linked to international single-stock baskets for the Taiwan market," Cowperthwaite says.
CSFB launched the Outperformance Note in Taiwan earlier this year, a structure which was well received in Hong Kong, according to Cowperthwaite. The structure pays out once the shares outperform a set index, regardless of the actual market direction. As investors become more sophisticated and the market is more advanced, Cowperthwaite says, CSFB aims to provide sensible alternatives to market norms.