RBC plans direct investment notes linked to infrastructure basket; Credit Suisse lowers barrier on product

By Kenneth Lim

Boston, Jan. 14 - Royal Bank of Canada plans to offer direct investment notes that will be linked to the share price of a basket of infrastructure stock as well as the dividend yield on the basket.

Meanwhile, Credit Suisse, acting through its Nassau Branch, lowered the upper barrier on a planned series of Market Neutral Barrier ProNotes linked to the beaten-down Financial Select Sector SPDR fund.

RBC offer direct investment notes

RBC plans to price zero-coupon direct investment notes due Feb. 26, 2010 linked to a basket of 20 infrastructure stocks.

The basket comprises equal weightings of the stocks of EMCOR Group, Inc., Fluor Corp., W.W. Grainger Inc., Fastenal Co., Quanta Services, Inc., Astec Industries, Inc., Covanta Holding Corp., Cummins Inc., Granite Construction Inc., URS Corp., Acuity Brands, Inc., Caterpillar Inc., Jacobs Engineering Group Inc., Martin Marietta Materials, Inc., Energy Conversion Devices, Inc., The Shaw Group Inc., Terex Corp., Vulcan Materials Co., Evergreen Solar, Inc. and Fuelcell Energy, Inc.

At maturity, investors will receive par plus 97.25% of the sum of the basket return and the basket dividend yield.

Interesting sector

The RBC notes are linked to a sector that could see more interest under new U.S. president Barack Obama, an investment adviser said.

"This could be an interesting sector going forward," the adviser said. "Part of the new president's economic plan going forward will probably be significant spending on infrastructure projects, so you could see some support for this sector."

The adviser said the 97.25% participation rate on the upside is offset by a similar rate on the downside.

"You're giving up some of the potential growth on the upside in exchange for smaller participation if the basket declines," the adviser said.

The direct investment aspect of the notes, which links the payout to the dividend yields on the stocks, could also boost the potential upside, the adviser added.

"I think it's better for the investor," the adviser said. "Obviously you're getting a little extra above just the share price, which is all you get with most structured products. But if some of the companies don't raise their dividends with their share prices, you could make less on one component of the return when you make more on the other component. That means if the share prices go up but the companies don't keep the yields the same, you get less on the dividend portion of your payout at maturity."

Credit Suisse lowers barrier

Credit Suisse lowered the upper barrier on its planned zero-coupon principal protected Market Neutral Barrier ProNotes due April 30, 2010 linked to the Financial Select Sector SPDR fund.

The notes will pay par plus the absolute return of the fund at maturity unless the fund closed above the upper barrier level or below the lower barrier level during the life of the notes. Otherwise the payout will be par.

In an amendment to the original prospectus, Credit Suisse lowered the upper barrier to 150% of the initial level, from 165%. The lower barrier level will still fall between 75% and 80% of the initial level. The exact lower barrier will be set at pricing.

Move negative for investors

The move makes the note more risky for investors, the adviser said.

"The financials have been falling over the last week after making some gains in December," the adviser said. "They took another hit today. That means volatility is up, so the chances of breaching the barrier are actually higher. And the shares actually fell.

"If you think that means the shares are closer to a bottom, then there's an even higher chance of breaching the new barrier. If you think it means the shares are going to go further, maybe you'll prefer that they bring the lower barrier even lower. But the bottom line is that they narrowed the safe zone when the underlying became more volatile, which is worse for the investor."

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