Risk makes for larger upside participation rates on S&P-linked notes; HSBC USA plans notes

By Sheri Kasprzak

New York, May 20 - A riskier and more volatile stock market may be pushing up upside participation rates, especially on notes linked to the S&P 500 index, said one market source reached Wednesday afternoon.

At least three offerings - two upcoming sales from HSBC USA Inc. and one recently priced deal from Credit Suisse through its Nassau branch - have provided a 300% upside participation rate on notes linked to the S&P 500 index.

"Obviously, there is a lot of volatility, still, in the stock market," noted the market source.

"It's natural that you would find a very big participation rate on an underlyer with a lot of volatility. That's probably going to become more common until the [stock] market levels out a little and becomes more stable."

HSBC's enhanced participation notes are expected to price on June 12. The one-year bonds carry a 300% upside participation rate and a maximum cap of between 21% to 27%, which will be determined at pricing.

Investors can expect to receive a return equal to the lesser of the principal amount times the index return multiplied by the upside participation rate, or the product of the principal amount times the maximum cap, assuming the index return is greater than or equal to 0%. If the index return is less than 0%, investors can expect to lose 1% of their principal amount for every percentage point the index return is below 0%.

The S&P 500 ended Wednesday down 4.66 at 903.47.

HSBC's other S&P notes

The investment bank is also set to price 13-month enhanced market participation notes also linked to the S&P 500 index. Those notes are also expected to price June 12.

These notes provide a 300% upside participation rate and a 100% downside participation rate. The maximum cap on the notes is between 21% and 27%, with the actual rate to be determined at pricing.

The investors will receive the lesser of the principal amount times the product of the upside participation rate and the index return or the principal amount times the maximum cap, assuming the index return is positive.

If the index return is negative, investors will receive the principal amount times the index return, effectively costing the investor 1% of the principal for every percentage point the index return is below zero.

Credit Suisse sells notes

In a recent, similar offering, Credit Suisse, Nassau Branch priced $11.91 million in 0% optimal entry return enhanced notes linked to the S&P 500 index.

Those notes pay par plus 300% of the gain, assuming the final index level is greater than the lookback level, up to a 15% maximum return. Investors are exposed to any decline in the index.

The lookback level is equal to the lowest closing level of the index during the 90-day period beginning on the pricing date. The index's closing level at pricing was 882.88.

Morgan Stanley to sell S&P-linked notes

Also along the lines of S&P-linked notes, Morgan Stanley & Co. is set to sell buffered return enhanced notes linked to the index, said a free-writing prospectus filed Wednesday with the Securities and Exchange Commission.

The one-year notes offer two-times upside leverage.

The notes pay twice the appreciation of the S&P 500 up to a maximum return of 18.8%. The notes include a 10% buffer. If the index declines by up to 10%, investors receive par at maturity. If the index declines by more than the 10% buffer, investors can expect to lose 1.1111% of their principal for every 1% decline beyond the buffer.

The deal is set to price Friday.

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