HSBC’s autocallable barrier notes with step-up premium on indexes to offer discounted entry

By Emma Trincal

New York, Sept. 21 – HSBC USA Inc.’s 0% autocallable barrier notes with step-up premium due Sept. 28, 2023 linked to the least performing of the Dow Jones industrial average, the Nasdaq-100 index and the Russell 2000 index should offer investors bargain prices amid a steep September sell-off following five months of relentless rally, advisers said.

The notes will be called at par plus an annualized call premium of 14% if each index closes at or above its initial level on any semiannual observation date on or after Sept. 29, 2021, according to an FWP filing with the Securities and Exchange Commission.

The payout will be par unless any index has finished below its 70% barrier level, in which case investors will lose 1% for each 1% decline of the least-performing index from its initial level.

Discounted price

“Unless we have a huge rally until Wednesday, and I doubt it, this will price at a discount,” said Carl Kunhardt, wealth advisor at Quest Capital Management.

The notes are set to price on Wednesday, according to the prospectus.

“I might do it.

“I don’t believe this note will see maturity. After one year, it will get called. You get out with a 14% return. What’s not to like?

“That’s why the three-year doesn’t concern me at all. As we speak, the Dow is down 800 points,” he said.

Political risks

Equity markets took broad losses on Monday.

“It’s all driven by the loss of Ruth Ginsburg. The Republicans have already made it clear they will vote on Trump’s nominee. The Democrats are shouting ‘bloody murder.’ That sets the stage for a big, big fight just ahead of the Elections,” he said.

The death of Supreme Court justice Ruth Bader Ginsburg on Friday created a vacancy debate in Washington six weeks ahead of the Presidential Elections.

In addition, the Supreme Court battle may reduce the odds of passing a stimulus deal, which would impact the economy, he added.

“You already have the uncertainty about the Elections. Who will be the next president? Everyone knows it won’t be known on Election night. But now, if the Dems try to block the confirmation using every tool they have, which they said they would, then what’s next? Are they going to impeach? Do they call out national riots? What’s going to happen to the economy?

“This could put the government in a complete halt.”

Monday slump

The market pullback began earlier this month. Since its all-time high on Sept. 2, the Nasdaq-100 index shed 11.75% putting it in correction territory.

The Dow Jones industrial average dropped 510 points on Monday, down 1.84% and off 7% from its Sept. 3 record peak.

The Russell 2,000 never revisited its all-time high of August 2018. But it finished Monday’s session down 3.35% for the day. Since its January 52-week high, the small-cap benchmark has lost 13.5%.

Fears of new lockdowns in Europe due to rising cases of Covid-19, the stalemate in Congress around a new stimulus for millions of unemployed, as well as falling crude oil prices were some of the headwinds on Monday adding to the turmoil caused by the prospect of a contested Election.

One-year horizon

“It’s great that this deal will price on Wednesday. It’s likely to be an opportune time because you’ll get in at a bargain price,” Kunhardt said.

“By the time you get to the first call, you’ll almost certainly be above pricing unless something really bad happens.

“A year from now we will have a new President. We will also have a vaccine, which may not be perfect but it’s going to be emotionally positive to the market. Most of the lockdowns will be going away. The economy will be picking up.”

“You’re buying at a dip. The call feature kicks in. You get 14%. You’re out. The note is done. Sounds good to me.”

Kunhardt also liked the 0.675% fee.

“It’s my kind of note.”

Timing and tenor

Jerry Verseput, president of Veripax Wealth Management, also liked the timing.

“If it was three weeks ago, no way because the market then was overheated,” he said.

“Today the indices have already dropped and that gives you a margin of safety.”

Verseput said he also liked the three-year maturity.

“We won’t be in the midst of a Presidential Election. We will only be at the early beginning of the Presidential campaign.

“I always avoid notes that expire around a potential shock. A new Presidential Election...something you don’t expect.”

Because of the timing, Verseput said he was comfortable with the 70% barrier. He also liked the premium payable on a semiannual basis but with a one-year call protection.

“If you’re looking to have exposure to the market, 14% is a pretty attractive return,” he said.

Issuer’s credit

“I kind of like the note.”

“HSBC is a pretty strong credit too.”

The five-year credit default swap rate of the British bank priced at 77 basis points on Monday, a rate 10 bps lower than the CDS spreads of Barclays Bank plc, according to Markit. Both levels are relatively low by historic measure.

The large U.S. banks show even tighter spreads ranging between 52 bps and 67 bps.

“I can’t predict what the market will be like when the notes price on Wednesday. But it looks like you’re already locking in some good value,” Verseput said.

HSBC Securities (USA) Inc. is the agent.

The notes will price on Sept. 23 and settle on Sept. 28.

The Cusip number is 40438CWW7.

© 2015 Prospect News.
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