HSBC, RBC's leveraged notes with no cap, low barrier tied to S&P, Euro Stoxx seen as appealing

By Emma Trincal

New York, Dec. 4 - UBS is marketing a couple of trigger performance securities, which buysiders find interesting for the uncapped and leveraged upside along with low triggers on the downside providing a fair amount of contingent protection on the downside, they said.

UBS announced the pricing of two trigger performance securities at the end of the month. Both products will be brought to market by different issuers. They have distinct terms, but advisers said that some of the common characteristics are appealing.

HSBC USA Inc. plans to price 0% trigger performance securities due Dec. 29, 2017 linked to the S&P 500 index, according to an FWP filing with the Securities and Exchange Commission.

The payout at maturity will be par plus 108% to 118% of any index gain, with the exact participation rate to be set at pricing.

Investors will receive par if the index falls by up to 50% and will be fully exposed to losses if the index falls below the 50% trigger level.

Leverage and no cap

Secondly, Royal Bank of Canada plans to price 0% trigger performance securities due Dec. 31, 2015 linked to the Euro Stoxx 50 index, according to an FWP filing with the SEC.

The payout at maturity will be par of $10 plus 140% to 150% times any index gain. The exact participation rate will be set at pricing.

Investors will receive par if the index falls by up to 35% and will be fully exposed to losses from the initial level if the index falls by more than 35%.

"The downside protection is pretty good on both of them," said Donald McCoy, financial adviser with Planners Financial Services.

"The absence of a cap makes both deals very attractive. It gives you a significant upside."

Bob Lee, market participant and consultant in structured products, formerly with Charles Schwab, agreed.

"Both notes offer the uncapped return, which is enticing," he said.

"Both are good products from a credit standpoint. HSBC and RBC are good credit," he added.

Finally, he noted the "European barrier" common to both structures, which he said was attractive too. European barriers are final barriers, which are only observed once, at maturity and not during the life of the notes.

For investors concerned about downside risk, the first deal from HSBC was the best, said McCoy.

Solid barrier

"The concept of being down 50% lower in five-years on the S&P 500... just about anyone would say that the probability of that happening is extremely low," he said.

"Unless you're extremely bearish and believe that we are heading for Armageddon, it's hard to see how one could expect the market to be 50% down five years from now.

"On the upside, it's conceivable to project an S&P aggregate of 40% on five years. On top of that, they give you an extra 10%. If I'm averaging 10% a year, it's like getting 11%. It sounds really good."

The first deal may have less upside potential than the second, but investors are getting more peace of mind, McCoy noted.

"You're buying a high probability of not losing anything at the end of five years. In return, you're getting a 10% bonus on top of whatever the S&P does at the end of five years.

"If you're up 10%, you're getting 11%. If you are down 10%, you're back to even."

Looking at the RBC three-year notes, McCoy saw additional risk factors, which he said made him feel less comfortable.

The first one was the smaller contingent protection of 35% instead of 50%. But the term also played a role.

"The RBC deal is a spicier version of that one. The main difference is the underlying but also the shorter maturity," he said.

"It's much more likely that the S&P 500 could take massive losses and come back in five years. The Euro Stoxx is much more volatile. You may not have enough time in three years to come back up.

"Overall, the second product combines two additional risk factors: the shorter term and the barrier. You may not have enough time to fight back if you have a significant downside along the way."

McCoy said that given the downside protection, the risk reward of the first profile was attractive in his view.

"With the S&P 500, the 50% drop is unlikely. Plus, you have more time to accumulate gains. If I go up a few percentages each year, the market will have to drop by 60% to break that barrier," he said.

"The odds of making money at the end of the five years are in your favor. Plus, they're sweetening the pot by offering you the 10% bonus to boost returns at the end.

"I prefer this deal. For me, the 50% downside brings such a significant level of comfort. It's the structure I like the most. The S&P losing 50% in five years would be almost unheard off while it's much more likely that the European equity market could be down 35% in three years," he said.

More leverage, please

Lee on the other hand, said that he preferred the second product for the higher upside potential provided by the higher leverage factor. In addition, he said that some of the downside protection in place in the first deal might not be even needed.

"One point one times leverage in the SPX is not much, not for that term. If it was for three-year notes, it may be acceptable but for a five-year, I wouldn't be interested," Lee said.

"The barrier itself is attractive but the probability of a market decline of 50% over five years is basically null. You would have to have another 2008. The central banks would not let that happen again.

"There is less protection on the three-year RBC notes tied to the Euro Stoxx index, but the European barrier gives me much more comfort in respect to the protection level.

"I do prefer the RBC one. It gives you more leverage. The 50% barrier for the other one might be overkill," he said.

Investors must also look at the underlying and pick a product based on their market view and targeted exposure. Lee said that he was reasonably confident that European equities would perform well in a three-year period.

Euro exposure

"Do I think that Europe will work out of its woes in three years? No. But they will make progresses and it will be reflected in the stock prices," he said.

"The Euro Stoxx is an appropriate underlying for those who want to get exposure to the euro zone and who believe that the Europeans are working their way out of their current problems.

"I would put my money toward the Euro Stoxx note because I think there's adequate protection for that three-year term. I also prefer more leverage regardless of the volatility. My view tilts me toward Europe as they're working out of their economic problems.

"The risk I run, if there's no consensus in Europe, is a euro zone meltdown and an equity selloff in Europe."

"I understand it's a risk. The euro zone has its monetary and fiscal problems. But every time they kick the can down the road they make minor progresses. So I'm confident that they will work their way out of this within the next three years," he said.

HSBC Securities (USA) Inc. and UBS Financial Services Inc. are the agents for the first deal tied to the S&P 500.

The notes will price on Dec. 26 and settle on Dec. 31.

The Cusip number is 40433T562.

UBS Financial Services Inc. and RBC Capital Markets, LLC are the agents for the second product linked to the Euro Stoxx 50 index.

The notes will price on Dec. 27 and settle on Dec. 31.

The Cusip number is 78008W651.

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