HSBC’s $8.93 million autocallable buffered AMPS on S&P 500 seen as favorable to investors

By Emma Trincal

New York, Dec. 12 – HSBC USA Inc.’s $8.93 million of 0% buffered Accelerated Market Participation Securities with call feature due Dec. 8, 2025 linked to the S&P 500 index offer compelling terms to investors both on the upside and on the downside, advisers said.

The securities will be automatically called at par plus a 12.5% call premium if the index closes at or above its initial level on Dec. 12, 2023, according to a 424B2 filing with the Securities and Exchange Commission.

If the index return is positive, the payout at maturity will be par plus 1.851 times the index return.

Investors will receive par if the index falls by 20% or less and will lose 1% for every 1% decline beyond 20%.

High premium

Scott Cramer, president of Cramer & Rauchegger, Inc., said he liked the risk-adjusted return as the notes offer two possible ways to generate a positive return and a sizable buffer on the downside.

“I like this note a lot. Either one of those scenarios is fine,” he said.

“In one year, you’re likely to get called. If the market is just flat or up, you will get called with a 12.5% return. Oh well. Who’s going to be upset about that?”

The scenario at maturity also presented a satisfying outcome.

“If we do have a recession in the second half of 2023 and you don’t get called, you have two more years to make it up. You’re levered. The levered upside is not capped. And you get a 20% buffer on the downside.

“I really like the risk-return of this note,” he said.

Exciting cap

The three-year maturity left investors with enough time to see the market grow from current lower levels.

The S&P 500 index is down 17% year to date, which also corresponds to its decline from its high of Jan. 4, 2022.

While gains are uncapped at maturity, the call premium is a 12.5% cap.

For Cramer, capping the upside at this level should not be an issue with most clients.

“I would be happy to be called. The only way it would be a problem is if the market rises 20% after one year. But that’s the chance you take.

“If you’re really bullish, this is definitely not the strategy for you,” he said.

One-year story

Carl Kunhardt, wealth adviser at Quest Capital Management, also liked the notes.

He used a decision-tree reasoning to assess the product. To him, the main decision was based on the one-time autocall at the end of the first year.

“You have to ask yourself: do most people believe that the S&P is going to be up in a year? Most people would agree. They may not agree on how much, but if you ask them if the index is going to be up at all, I think the answer would be overwhelmingly ‘yes,’” he said.

Many of those expectations are based on the fact that the market has already declined this year. Some analysts expect the Federal Reserve to “pivot” next year after several aggressive rate hikes conducted in 2022.

“There is a lot of talk about the market going into a recession. But the market is a forward-looking indicator, and this assumption is already priced in,” he said.

From that angle the note should be seen as a one-year investment, he added.

“The terms at maturity don’t really matter because you’ll never see them,” he said.

Likely winner

Based on the same assumption, Kunhardt would compare the notes to a long-only investment.

“Would I invest in the S&P for a guaranteed 12.5% in one year and with no protection?

“If the answer is yes, I’d buy the notes.

“And oh! By the way...it’s not really without protection because if you’re negative after one year, you have two years to make it up plus a 20% buffer at maturity,” he said.

For Kunhardt, investors for the most part are ruling out a negative market performance in 2023.

“You get the call premium any time the index is not negative. It could be zero. Most people agree that the market right now is at a low. Is it the bottom? We don’t know, but you can assume we are near it. So, a year from now, you can expect that we’ll be north or where we are now.”

“The only cost to making that bet is you’re giving up that dividend for that year.

“I’d be doing this note every day of the year,” he said.

HSBC Securities (USA) Inc. is the agent.

The notes settled on Thursday.

The Cusip number is 40441XUX6.

The fee is 0%.

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