HSBC’s $548,000 barrier participation notes with call feature on indexes offer two ways to win

By Emma Trincal

New York, Dec. 6 – HSBC USA Inc.’s $548,000 of 0% barrier participation notes with call feature due Dec. 6, 2024 linked to the Dow Jones industrial average, the Russell 2000 index and the Nasdaq-100 index appealed to financial advisers for the uncapped leveraged payout at maturity along with a call option after one year, providing two distinct ways to generate returns.

The notes will be called at par plus 17% if the worst performing index closes at or above its initial level on Dec. 1, 2022, according to a 424B2 filing with the Securities and Exchange Commission.

If the notes are not called and the worst performing index finishes at or above its initial level, the payout at maturity will be par plus 1.5 times the return of the worst performing index.

If the worst performing index finishes negative but at or above its 70% barrier level, the payout will be par. Otherwise, investors will be fully exposed to the decline of the worst performing index.

Election year

“I would probably do it,” said Carl Kunhardt, wealth adviser at Quest Capital Management.

“Right off the cuff, I like it.

“I like the 17% premium and 1.5x to juice your return if you don’t get called.

“It’s on three baseline indexes. You’re really betting on the U.S. market. I like that too.”

On the other hand, the three-year term could also contribute to some of the risk.

“There are good and bad things about the three-year tenor,” he said.

“On a macro level, 2024 is an election year. I like that the note matures just after November. If History repeats itself, it’s usually a good time for the market. You don’t have the volatility that precedes the elections. I’d be more concerned if the anniversary date was in August. But usually just after the elections, you have a short honeymoon period. A new president has just been elected and nothing really changes until Jan. 20.”

Hesitations on the term

A three-year tenor offered the advantage of being “neither too long nor too short,” he said.

But he would “put the three-year tenor on both sides of the ledger.”

“If I don’t get called a year from now, I only have two years to get to normal,” he asid.

Investors may need more time to make up for the loss and to generate the necessary index growth to make the leverage worthwhile, he explained.

However, the barrier was adequately priced for the three-year period.

“The likelihood of being down 30% from pricing is probably kind of low,” he said.

Good overall

“So, I like the terms. But the timing of it...that would be my only concern.

“If you get called in one year with 17%, you hit home run.”

“If you’re not called, you need to be able to make up for it in the next two years. That’s the risk.”

“But there is always a risk. You’ll never find something that’s entirely positive.

“With the leverage, the no-cap, the relatively short maturity, the one-year exit, there is enough positive to warrant consideration.”

Real equity return

A financial adviser also said he liked the note.

“17% is a heck of a fixed return for anything equity.

“Of course, all three indexes could be up more than that, but you don’t want to be greedy.

“The only thing that matters to me is to get an equity-type of return when I take equity risk. 17% a year certainly fits into the category of equity-type return. So, I’m perfectly happy with that,” the adviser said.

Barrier assessment

The downside risk was not his main concern for this particular deal.

He estimated the risk as minimal even though he could not quantify it, as he usually does, using back-testing data.

“I can’t really calculate the chances of losing money. I only have performance data on the Dow. But even if I had the data on all three underlying, it would be a challenge to calculate the probabilities. First, it’s a worst-of. And also, I have no way to model the probabilities of return if one index is down after one year then up in the next two, or down then up then down again. Too many moving parts,” he said.

Yet, the barrier appeared to be “reasonably” priced given the broadly diversified nature of the underlying indexes, he said.

“To break the 30% over three years is going to be very, very unlikely,” he said.

Two ways

The two different types of payment – the autocallable after one year or the participation at maturity – made the note unusually attractive.

“You get two ways to win,” he said.

The early redemption after one year was probably the most desirable scenario, he added.

“If you don’t get called, you’re in for another two years.”

But the perspective of earning unlimited returns over the last two thirds of the term was also enticing.

Surprisingly small

“The uncapped 150% leverage if you’re not called. I love that. I hate being capped out in structured notes linked to equity indexes. If you had been capped in the past five years, you would have left money on the table every single year. So, the no-cap is good.

The leverage factor was significant enough to make up for the lost dividends, he added.

“The leverage is good.

“All three indexes are rock-solid indexes.

“The 0.5% fee, on a three-year, is extremely good.”

“I really like this structure. It’s hard to poke any holes in it.

“This is one of these... you wonder why they only got half a million dollars.

“This is a note that we would certainly take a very strong look at,” he said.

HSBC Securities (USA) Inc. is the underwriter.

The notes settled on Monday.

The Cusip number is 40439JUS2.

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