HSBC’s autocallable barrier notes on Apple, Tesla boil down to Tesla exposure

By Emma Trincal

New York, May 10 – HSBC USA Inc.’s $500,000 of autocallable contingent income barrier notes due May 9, 2023 linked to the least performing of the common stocks of Apple Inc. and Tesla, Inc. may appear to be highly risky given the current sell-off hitting growth stocks, advisers said, pointing to Tesla as the likely worst-performing stock. But the structure offers terms that are difficult to resist for some.

The notes will pay a contingent quarterly coupon plus any previously unpaid coupons at an annualized rate of 19.38% if each stock closes at or above its coupon trigger level, 50% of the initial level, on the observation date for that period, according to a 424B2 filing with the Securities and Exchange Commission.

The notes will be called at par if each stock closes at or above its initial share price on any quarterly call observation date after six months.

If the notes are not called and each stock finishes at or above its 50% barrier level, the payout at maturity will be par and any previously unpaid coupons. Otherwise, investors will lose 1% for each 1% decline of the least-performing stock from its initial level.

Two darlings

Tom Balcom, founder or 1650 Wealth Management, said the risk-return trade-off was fair.

“Here is a nice, juicy coupon on two familiar names, two darlings of Wall Street,” he said.

“There is risk of course, especially with Tesla, which is a very volatile stock.

“But they give you a large downside protection. One of them would have to see its price cut in half before you could take a loss. And you already had a nice pullback, especially Tesla.”

Discounted price

When the deal priced last week, Tesla shares closed at $952.62, or 23.3% off their November 52-week high.

However, since then and amid a continued sell-off, the stock fell further, closing on Tuesday at $800.04, which represents a decline of 16% from the pricing level. Apple’s recent price action was much less volatile. The stock closed at $166.02 on the trade date, a 9.2% discount from its January high. And while the share price has fallen since that date by 5.6%, such price drop is much more muted.

“We are going through a heavy sell-off right now. But both stocks still priced at lower levels than their recent peaks. So, you’re getting a deep barrier of 50% from a level that’s already lower.

“This gives you additional safety,” he said.

Memory

Balcom also liked the memory feature.

“The 50% barrier for the coupon is deep. But should you miss one or two payments, you know that you can make up for it later.

“The stocks could be down during the term but if you finish above 50% you get the entire coupon, almost 20%,” he said.

The adviser admitted that the notes were not for everyone.

Equity allocation

“Even though it pays a coupon, I wouldn’t use it as fixed-income replacement because the volatility of the stocks. Tesla in particular is too volatile. It would be part of my equity allocation,” he said.

Some of the risks may be related to Tesla CEO Elon Musk’s financing of his acquisition of Twitter Inc.

“There may be a short-term risk, but I don’t really think it’s a major risk. He has already secured financing and found partners, including Qatar and Fidelity.

In conclusion, he said he liked the risk-return of the notes.

“Sure, there is risk. But you’re getting compensated for it. I like the deal,” he said.

The ‘Elon’ factor

A financial adviser was more cautious about the notes, pointing to the volatility of Tesla.

“While Apple has its ups and downs, it seems reasonable to assume that the riskiest of the two is Tesla. Tesla shows significantly greater percentage moves than Apple. It could drop 50% even in one year,” he said.

But the greatest risk factor, according to this adviser, was the personality of the company’s CEO.

“Tesla is a very unpredictable company because its CEO, Elon Musk, does unpredictable things. He likes surprises, which is very unusual for a CEO.

“Who would have thought a couple of months ago that he was going to buy Twitter?”

Margin call

The risk for shareholders is that most of Musk’s wealth is tied to Tesla shares, he said.

“He pledged shares of Tesla as collateral to buy Twitter. This guy has no cash. Anything he wants to do he uses Tesla as collateral to borrow money. If he can’t make good on his loans, he will be forced to sell the shares of his own company. If Tesla shares keep on going down, he will be asked to pledge more. It’s like a margin call.

“Anyone who keeps on borrowing money using their shares or their charm ends up bankrupting not just themselves but their own company.

“Right now, things are working out because Tesla is a cult-stock, and its shareholders are closer to being worshippers.

“But the earnings of the company do not come close to justify its exorbitant price,” he said.

Time to fall

Investors considering the notes should consider the risk of a 50% price decline but also its timing.

“If you’re buying this note, you’re betting that Tesla could drop 50% in two or three years or even later, but not within one year.

“Or you’re assuming that it could take such a hit and recover within a year. For instance, it drops 50% and finish down only 40%.

“But you’re taking a timing risk. You’re betting that it won’t collapse within one year.

“I wouldn’t take that bet,” he said.

HSBC Securities (USA) Inc. is the agent.

The notes settled on Monday.

The Cusip number is 40439J4E2.

The fee is 1.25%.

© 2015 Prospect News.
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