HSBC to price two uncapped buffered equity index-linked note deals aimed at cautious bulls

By Emma Trincal

New York, June 21 – HSBC USA Inc. is prepping two offerings of equity-based leveraged buffered notes with no cap in an attempt to appeal to advisers always on the lookout for products combining buffers and unlimited upside, a rare mix in today’s challenging market conditions.

The pricing of the two different upcoming offerings is made possible in one case by extending the term and in the other by reducing the buffer size and leverage amount.

In the first deal, HSBC plans to price 0% Buffered Uncapped Market Participation Securities due June 28, 2019 linked to a basket consisting of the S&P 500 index with a 50% weight, the Euro Stoxx 50 index with a 30% weight and the Russell 2000 index with a 20% weight, according to an FWP filing with the Securities and Exchange Commission.

The upside participation rate is 110%. There is a 10% buffer on the downside.

The Cusip number is 40433UPC4.

In the second offering, HSBC is readying 0% Buffered Uncapped Market Participation Securities due June 30, 2021 linked to the Euro Stoxx 50, according to a separate FWP filing.

With a 115% upside participation rate and a 25% buffer, the five-year product offers a more defensive profile and slightly more upside leverage.

The Cusip number is 40433UNP7.

Five years

Without hesitation, Jerry Verseput, president of Veripax Financial Management, said he preferred the longer-dated note.

“I like the five-year time horizon. If you’re going to invest in equity indices, you should have more than three years anyway,” he said.

Five-year notes are a “sweet spot” for his clients, he explained.

“We rarely go under five years. We would consider six-year, but for some reason, six-year won’t resonate so well with clients,” he said.

Using five-year products does not just reflect an investment strategy focusing on the long haul, he explained. Better terms can also be negotiated with issuers when the duration is extended.

Brexit

“I really like this five-year. There is no upside risk since there is no cap. No risk of missing out on anything. And you get this big 25% buffer. You’re guaranteed to beat the market on the downside.”

The three-year note in comparison with its 10% buffer showed less appeal, he said. This may have to do with the looming U.K. referendum on Thursday, he reasoned, as the notes are scheduled to price after the vote.

“They probably priced it assuming the risk will be gone or at least the big unknown will be known. That’s probably why they’re not very aggressive on their terms, at least on the upside, which doesn’t give you that much. But still, 25% is better than being long the index.”

Should he consider the deal, he would execute it prior to the vote in order to get better terms.

“I would think that if you’re facing the issue of Europe, you would be able to lock in better terms, for instance a greater buffer and perhaps more leverage,” he said.

Buffer size

In both deals, the upside leverage is not significant. Most of the value comes from the uncapped return.

“The small addition, 1.10 or 1.15 above 1X ... is there to make up for the dividends,” he said.

Investors in structured notes are not entitled to receive dividends.

The real benefit of the note is the combination of a sizable 25% buffer with unlimited upside.

Looking at the shorter-dated basket-linked product, he said the 10% buffer is not “exciting” enough.

“If I’m going to have to deal with the complexities of a note, I want to have more than a 10% buffer on the downside,” he said.

Mini allocation

Steven Foldes, vice-chairman of Evensky & Katz/Foldes Financial Wealth Management, had a different take due to his preference for shorter-dated notes.

“I wouldn’t consider the five-year because it’s way too long for us. Three years is already a long time, but it’s within the range,” he said.

The three-year product linked to the basket of three equity indexes is not overly exciting but offers some interesting features, he said.

“It’s an interesting note because they give you a 70% U.S. exposure and 30% Europe exposure, so it’s a mini-asset-allocated note, which is nice,” he said.

Good news

Yet Foldes could not get “too excited” about the structure.

“It’s an OK note, but I’m on the fence,” he said.

“The downside [protection] is not huge. The upside leverage is certainly very modest, so there is not a huge amount of enthusiasm.”

The most interesting structural element is to get “no cap” and a buffer in the same product.

“That’s the good news,” he said.

Also part of the “good news” is the three-year tenor and the creditworthiness of the issuer.

“From what we understand HSBC credit is reasonable, so that wouldn’t be an issue,” he said.

Credit, dividends

Yet credit risk exposure is still a matter to consider when evaluating pricing.

“The bad news is that you’re exposed to the credit risk of this bank and you lose the dividends. Over the course of three years, it’s near 7% in unpaid dividends,” he said.

The average dividend yield of the basket is 2.26%.

“On the other hand, you’re not getting much on the upside and it’s a small buffer.”

Investors in the notes would have to decide for themselves.

“It’s one that makes sense, but you have to decide if it’s worth not participating in the dividends and having this credit issue. I’m somewhat ambivalent about it,” he said.

The three-year and five-year notes offerings will price Monday.

HSBC Securities (USA) Inc. is the underwriter for both offerings.

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