HSBC’s trigger PLUS with leverage, no cap tied to FTSE offer good terms for bullish U.K. play

By Emma Trincal

New York, Aug. 15 – HSBC USA Inc.’s 0% trigger Performance Leveraged Upside Securities due Feb. 19, 2020 linked to the FTSE 100 index offer attractive terms for investors seeking access to the United Kingdom, sources said.

The payout at maturity will be par plus 1.5 times any index gain, according to an FWP filing with the Securities and Exchange Commission.

Investors will receive par if the index falls by up to 41% and will be fully exposed to the decline if the index finishes below the 59% trigger level.

The FTSE 100 consists of the 100 most highly capitalized blue-chip companies listed on the London Stock Exchange. This benchmark is not commonly used in structured notes as a standalone underlying index. Only one deal linked to the FTSE 100 has priced so far this year, according to data compiled by Prospect News. It was another HSBC deal, which priced for $5 million with a similar structure offering leverage and a barrier, according to the data.

The vote by the United Kingdom in June to leave the European Union – an event known as “Brexit” – must have been an incentive for issuers to price notes on this infrequently used index, sources said.

Gains

The recent performance of the benchmark, already up more than 10% this year, may be another one.

“The double-digit performance is really surprising considering Brexit,” said Michael Kalscheur, financial adviser at Castle Wealth Advisors.

“Last year, the index was negative. It has vastly underperformed the S&P in the last five years. But it’s definitely up this year and up considerably.”

Name recognition

This adviser said that the FTSE 100 would be for his clients “harder to track” as the name among U.S. investors is not as well-known as the S&P 500 or even the Euro Stoxx 50.

“But I can easily imagine telling my clients that this is the S&P 100 of the U.K. Everyone has heard of companies like HSBC, GlaxoSmithKline, Royal Dutch Shell and BP. Most clients are going to be comfortable with those big companies,” he said.

Those stocks are among the top five constituents in the index.

One advantage of the notes, he said, is access, noting that there are no exchange-traded funds tracking this specific index in the United States.

The iShares MSCI U.K. ETF replicates another U.K. equity index, but one that is different as it includes not just large-cap but also mid-cap companies.

Dividend yield

Kalscheur said he finds the structure of the notes compelling.

“The terms of the deal are very beneficial,” he said.

“To have 150% of the upside, uncapped on a three-and-a-half-year ... we like that a lot.”

Even if investors must give up a 3.72% dividend yield over the term, the leverage factor is sufficient to offset most of the opportunity cost, he said.

“It’s a good yield that you’re giving up, which is good and bad. It’s good because you can get better terms and bad because you are giving up more,” he said.

“But the leverage is sufficient to compensate you for that.

“With 1.5 leverage, you’re going to make up the lack of dividends very quickly.”

Barrier, fee

The downside is also attractive even though the protection is provided through a barrier.

“We prefer buffers, but 40% decline over a three-year period makes me feel that we’re in fairly good hands. If it was a 30% barrier, probably not ... a 20% buffer, yes, probably,” he said.

Kalscheur also likes the cost of the notes. The fee is 2%, according to the prospectus, or 57 basis points per annum.

“That’s a very competitive [fee]. That’s the kind I consider institutional pricing,” he said.

Fees matter, he continued, because when small, they provide better terms.

“I can tell when you pay 1% or 1.5% a year on a structured note ... you can tell the quality of the terms based on what the fees are, and it’s usually not good when the fees are high,” he said.

“This is a nice offering with good terms, good fees, good leverage and good downside. We like the issuer’s credit too. The index would not be my first choice or even my second choice, but it’s a nice, solid product.”

Brexit play

Jerrod Dawson, director of investment research at Quest Capital Management, said it makes sense that a structured note tied to U.K stocks would be brought to market after Brexit.

“If you’re looking for direct exposure to the U.K. market, this is a convenient way to do it. There is uncertainty on how Brexit will play out. Some believe there is potential for upside and some don’t. If you’re bullish, this note offers very attractive terms,” he said.

Not receiving the dividend for three and a half years is the major concession investors have to make, in his view.

“But with the 1.5 leverage, I think it’s a good trade-off,” he said.

“Obviously you have to be bullish on the U.K.”

Some investors have become bullish after Brexit once the market quickly shrugged off the initial shock.

Others have recently been encouraged by the Bank of England’s decision to cut rates, which pushed the pound lower, helping U.K. exporters.

Value

“Whatever your reasoning is, if you think U.K. stocks will outperform, if you’re bullish, this note is a pretty good way to play it,” he said.

“You’re getting additional upside to compensate for the lack of dividends.

“You have no cap on your gains.

“You have a pretty large protection.

“You get more bang for your buck from this product than if you just play it straight out.

“It’s an opportunity to get your foot in that market, one that’s not necessarily that easy to get access to.”

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

The notes were scheduled to price Monday and will settle Thursday.

The Cusip number is 40434V111.

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