HSBC to price four buffered AMPS each linked to index or ETF for cautious, neutral investors

By Emma Trincal

New York, Nov. 5 - HSBC USA Inc. plans to price a series of two-year leveraged buffered notes each linked to an equity index or exchange-traded fund. They are designed for investors with a range-bound view of the market seeking downside protection through a double-digit buffer.

All four products offer the same downside protection level, but the caps vary depending on the underlying, according to a 424B2 filing with the Securities and Exchange Commission. All four different issues give investors double upside exposure to the underlying gain up to the cap and have the same maturity date, Nov. 25, 2015.

In one deal, HSBC plans to price 0% buffered Accelerated Market Participation Securities linked to the Russell 2000 index.

The payout at maturity will be par plus double any gain in the index, up to a maximum return of 16% to 20%. The exact cap will be set at pricing. Investors will receive par if the index falls by up to 10% and will lose 1% for each 1% decline beyond 10%.

A second product, this one linked to the S&P 500 index, provides a 12.5% to 16.5% cap.

Another buffered AMPS offering is linked to the Euro Stoxx 50 index and has a 17% to 21% maximum return. The same cap range applies to the fourth note, which is linked to the iShares MSCI Emerging Markets index fund.

"This is not for someone who is overly positive or bearish. It's for people who think the market is mostly played out but that it's not prone for a big fall either," said Donald McCoy, financial adviser at Planners Financial Services.

McCoy said that the four separate deals are "pretty much the same" and that "you pick the product with the index you have the most confidence in."

Range bound

The notes are most appropriate for investors with a sideways view of the market, he noted.

"To me, this is for someone who sees limited upside over the next two years, who has a view that the market will be trading in a very tight range," he said.

"On the downside, you believe that a significant downside is unlikely."

The 10% buffer is not necessarily "a lot" and is "surprisingly" the same for all four products, he said.

"Here is a case where they're giving you a little bit of downside protection. If you're very concerned about the market, you need to know that you're only getting 10%. Beyond that, if the market falls 20%, 25%, you're getting less exposure but not that much less," he added.

"I guess it works if you don't think much is going to happen. You have to believe that the index might be down but not down by that much.

"On the upside, your expectations are limited. You can reach the 20% cap on the Russell by having the small-cap benchmark grow 5% a year since there is the leverage. If you think the market won't do much and that the cap is your best bet, then it's fine. But you have to be happy with what you have. If the market turns out to do better, if the Russell is up 30% after two years, you have to be happy with the outcome."

McCoy said that the four underlyings have very different levels of volatility and upside potential.

"They don't give you different buffers. They just change the cap level. That's interesting," he said.

"If you're looking for value proposition, the Euro Stoxx is probably better than the S&P, but it also carries a little bit more uncertainty, so you get a higher cap. At the same time, if you choose the Euro Stoxx over the S&P, you may also lose more money in a market decline with only 10% in downside protection. Europe offers value, but you have to have the stomach for it."

Appealing trade-off

Tom Balcom, founder of 1650 Wealth Management, said that his clients often welcome the idea of getting less upside for more protection, which is what those notes have been designed for.

"The whole idea is this trade off: You may get less return, but you have more protection," he said.

With equity markets, in particular the S&P 500, at all-time highs, the danger of too much complacency has emerged, he noted. Some investors have become more cautious, asking their advisers to manage the risk of a correction more aggressively, he said.

"The issuer gives you a 10% buffer. People like to have double-digit downside protection. We often use those buffers for 14-month or two-year products. We tell our clients if the market is down 15%, there will be loss of principal, but it will be only 5%, or even if it's down 20%, clients know that they will lose 10% instead of 20%. If we have a terrible market, the risk of a loss of principal will not be removed, but it will be reduced significantly," he said.

"We give up potential upside, and when the market is rallying, the notes will underperform the market. But the client is aware of that. He's willing to give up potential returns. We're playing defense first. Our clients understand and they like that. Managing the downside risk is more important for them.

"If you get a 20% return after two years, it's 10% annualized. The only way it's terrible is if the market is up 40%.

"A few years ago, we had to manage fears. Now you also have to manage greed. I'm a big fan of buffered enhanced notes. We use it with our clients.

"Of course those notes are not for everyone. They wouldn't make any sense for the very aggressive bull. But in this current market, managing the downside risk has become more important for some of our clients."

The four offerings will price Nov. 20 and settle Nov. 25.

HSBC Securities (USA) Inc. is the agent.

The Cusip number is 40432XNA5 for the notes based on the Russell 2000, 40432XN98 for the notes linked to the S&P 500, 40432XNC1 for the Euro Stoxx 50 product and 40432XNB3 for the product linked to the iShares MSCI Emerging Markets.

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