HONG KONG: Sales of structured notes in Hong Kong dollars are the highest in a decade as investors, still stinging from losses triggered by the failure of Lehman Brothers Holdings Inc, jump at coupons of as much as 25 percent.

New issues of local-currency structured notes, or hybrid securities designed to give investors greater returns, climbed to HK$7.8 billion ($1 billion) in June compared to HK$2.8 billion in May and HK$167 million in January, according to data compiled by Bloomberg. Sales topped HK$6.7 billion this month.

"This growth is largely due to people feeling more confident and a rebound in the market," Mark Wightman, Singapore-based vice-president Asia-Pacific for SuperDerivatives Inc, said in an interview. "There is a fear of missing out on the upside, which is big in Asian market psychology," he said.

The Hang Seng Index closed above 20,000 Monday for the first time since New York-based Lehman's September collapse shuttered credit markets amid speculation the worst of the global recession has passed. The Hong Kong Monetary Authority (HKMA) kept the base interest rate at 0.25 percent on June 25 as policymakers seek to stimulate spending and economic growth.

Structured notes are designed to give investors greater returns than government bonds or bank deposits by combining fixed-income instruments with derivatives tracking movements in equities, currencies or other assets. Derivatives are financial contracts used to hedge against changes in stocks, bonds, currencies, commodities, interest rates and weather.

HSBC Bank Plc, a unit of HSBC Holdings Plc, sold HK$1 million of 13.08 percent structured notes due July 2010 yesterday with the coupon and redemption value linked to a Hong Kong tracker fund, according to Bloomberg data.

London-based HSBC pays 0.001 percent interest on savings deposits of at least HK$5,000, the lowest since August 2004, the data show. Standard Chartered Plc, DBS Bank Hong Kong Ltd, Bank of China Ltd and Bank of East Asia Ltd pay 0.01 percent.

Many of the equity derivative-linked notes sold to individuals in Hong Kong offer annualized coupons of as much as 25 percent, though they typically have much shorter maturities so the returns are lower, Wightman said.

"Flows in the structured product space in Hong Kong have steadily increased in the past few weeks and this may lead to an improvement in liquidity" in the underlying market for derivatives, analysts led by London-based Stephen Cohen, head of equity-linked research at Nomura International Plc, wrote in a note to clients last week.

Sixteen banks have offered to pay at least 60 cents on the dollar to investors in so-called minibonds guaranteed by Lehman that lost their value when the Wall Street securities firm failed, the HKMA and securities regulator said July 22.

The minibonds, linked to the debt of Hong Kong companies, including Hutchison Whampoa Ltd and Sun Hung Kai Properties Ltd, were sold to more than 40,000 investors. Elderly, mentally-ill and poorly-educated people were among the buyers, according to an HKMA investigation made public by lawmakers on April 28.

Bloomberg News

(HK Edition 07/29/2009 page4)