HSBC’s $10 million trigger jump notes on four stocks offer potential for alpha

By Emma Trincal

New York, June 21 – HSBC USA Inc.’s $10 million of 0% trigger jump securities due July 7, 2022 linked to the worst performing of the stocks of Airbnb, Inc., Facebook, Inc., Live Nation Entertainment, Inc. and United Airlines Holdings, Inc. represent an attractive structure, but some of the underlying stocks are riskier than others, advisers said.

If the final worst-performing stock is greater than or equal to its trigger price, 60% of its initial level, the payout at maturity will be par of $10 plus the upside payment, according to a 424B2 filing with the Securities and Exchange Commission.

The upside payment is 19.2%.

If the final worst-performing stock is less than the trigger level, investors will be exposed to the decline of the worst-performing stock from its initial level.

Potential to outperform

“I like the concept,” said Jerry Verseput, president of Veripax Wealth Management.

“It’s not about how much they can go up. It’s about making sure that none of the stocks will collapse. Because a 40% drop in one year, that’s a collapse.”

One of the most beneficial aspects of the structure is the possibility for investors to outperform the stock in a wide range, from minus 40% to plus 19.2%, he noted.

There is additional risk associated with stocks, especially in a worst-of, but the 60% trigger was helpful, he added.

“This is a deal so narrowly focused on [four] stocks. Usually, I prefer ETFs but I’m OK with this. There is no other way to make money right now than taking on more risk,” he said.

Four stocks

However, the four stocks were not equally resilient, he said.

“As the air travel continues to ramp up, I don’t see United down 40% in one year.

“For Facebook, I don’t expect that kind of downside either. Facebook is so ubiquitous.

“Those two stocks are embedded staples of the economy.

“But Live Nation is not an underpinning of the economy. It’s just a stock.

“And Airbnb can jump around by 40%. Some scandal happens and everybody switches to Vrbo.”

Vrbo, another online vacation rental service, is Airbnb’s main competitor in the United States.

“I would stick to Facebook and United Airlines. I’d rather take a lower payout and just go with those two names,” he said.

Speculative

Carl Kunhardt, wealth adviser at Quest Capital Management, said he also liked the structure.

“It’s speculative. But a 40% drop is not that common. So, you have a chance to get a pretty good return,” he said.

Unfortunately, such probability was limited by the number of stocks in the worst-of. In addition, Kunhardt did not like the four underliers equally.

Kunhardt said that he sometimes uses speculative notes for his own account, not for his clients.

“I wouldn’t do this deal even for myself,” he said.

Facebook

“Facebook, like any of the big tech stocks, could be at risk with Congress trying to break up big tech companies.

“This is a bipartisan initiative. You could say that Facebook is a bit more at risk because Zuckerberg has managed to antagonize both sides of the aisle.

“Despite that, it could take a year before Congress decides what they’re going to do and much longer before they do anything.

“So, I’m not too worried about Facebook for the next 12 months. Facebook is going to do what Facebook is doing.”

United Airlines

This adviser saw United Airlines as slightly riskier. But he did not expect the stock to drop more than 40% either.

As part of the risk, the post-pandemic environment has created new challenges for the airline industry, he said.

He describes the situation in those terms: “The lockdown period is over. People got their vaccines. Airports are at full capacity. Demand is very strong.

“Prices of flights have gone up a lot. The airlines had to cancel flights recently for lack of maintenance staff. The airplanes parked during the pandemic have not all been brought back to service.

“Plenty of demand. No supply. This is a bottleneck situation.”

With higher prices and planes filled to maximum capacity, demand may fall, he said.

“Demand could also fall if we have another outbreak obviously.

“But will United Airlines be down 41%? I don’t think so. It didn’t happen during the pandemic. People will fly if they need to fly especially for business.”

Hospitality

Airbnb’s business had an advantage.

“There should be more traffic for online rentals than with the large resorts with a lot of people,” he said.

That’s because the traditional hospitality industry is having troubles finding workers.

“I think Airbnb could benefit from this anomaly at least short term,” he said.

Live Entertainment

But Kunhardt was not so optimistic about Live Entertainment, a company that promotes live events, such as concerts, including ticketing, sponsorship and advertising.

“I’m not familiar with the stock. But if we have another outbreak or downturn, I don’t see anybody scheduling concerts. Even now as we are in the reopening phase, I don’t see many people going to concerts.

“A 41% drop with this one is a real possibility,” he said.

HSBC Securities (USA) Inc. is the agent with Morgan Stanley Wealth Management handling distribution.

The notes priced on June 17 and will settle on Tuesday.

The Cusip number is 40439K789.

The fee is 0.64%.

© 2015 Prospect News.
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