HSBC’s $12.18 million autocallable leveraged buffered notes on Nasdaq-100 lack protection

By Emma Trincal

New York, Oct. 20 – HSBC USA Inc.’s $12.18 million of 0% autocallable leveraged notes due Oct. 18, 2023 linked to the Nasdaq-100 index could benefit from a barrier or buffer, sources said, even if the call premium and upside participation are attractive.

The notes will be called at par plus 10.28% if the index closes at or above its initial level on Oct. 24, 2022, 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 2 times the index return. Investors will be fully exposed to any index decline.

“A 10% call premium is pretty high for a single index. You’re one-to-one on the downside. There’s got to be some give up and that’s the downside protection,” a market participant said.

Another recent deal

A few weeks before the trade date, HSBC priced a deal with a similar structure: two-year tenor, single autocall date after one year with an annualized call premium and at maturity (in the absence of a call), 2 times the gain in the index with no cap. The annual call premium was 9.4%. This previous offering (Cusip: 40439JNA9) priced on Sept. 24 and was distributed by JPMorgan. The most recent offering (Cusip: 40439JQA6) priced on Oct. 14.

The major differences between the two deals – aside from the timing of their respective trade dates – were two-fold: the first deal was linked to the S&P 500 index, and it also included an 85% barrier at maturity.

Cost structure

“The difference in the call premium, 9.4% versus 10.28%, is not huge,” the market participant said.

“The big difference is the barrier versus no barrier. Normally, the Nasdaq should give you better terms. It’s more volatile. I think what makes those two deals different is also the timing. It priced almost a month ago. One month can make a difference. Personally, I would prefer the S&P one,” the market participant added.

The cost structure also made a difference.

The October deal carries a 2% fee while last month’s barrier notes on the S&P 500 index showed a 1.5% fee, according to the filings.

Barrier wanted

A financial adviser who saw both offerings said the fee made the second deal less compelling.

“Two percent on a two-year is very high. When you pay 50 basis points less on commissions, it’s going to improve the terms. We see it with the barrier,” he said.

This financial adviser said he also preferred the older deal.

“Having 2x leverage, no cap and an 85% barrier for me is superior to having a slightly higher premium and no downside protection,” he said.

“I also prefer the S&P. It’s less volatile than the Nasdaq.

“The Nasdaq has certainly outperformed the S&P. Even though the upside may be greater, I don’t have a barrier. For 88 bps more on the coupon, I lose my downside protection.

“I prefer having a barrier than not.”

Call magic

In both deals, however, the structure offers several advantages such as the leveraged exposure, the absence of any cap and a relatively short tenor.

The one-time autocall is what allowed the issuer to price the uncapped leveraged exposure over a short period of time, the market participant explained.

“If the notes mature, by definition, it means the underlying is down after the end of the first year because you haven’t been called. You’re entering year two below where you started from,” he said.

Investors are hoping to only be “slightly below” the initial price, so there won’t be too much to recover from, he said.

“But you’re down on year one and now you only have year two to realize gains that are high enough to make the upside payout worthwhile.

“Let’s not forget that you can get called easily. The leverage may never play out.

“The fact that you’re less likely to make a home run at maturity probably reduces drastically the cost of the upside participation. That’s how you can price the two-times with unlimited exposure.”

Return enhancement

This market participant said he saw this type of structure before but over longer tenors, such as three years.

“I’ve also seen this but with several indices. This version with a single index is more appealing than the worst-of,” he said.

However, there is a risk in using leverage to enhance the upside return in this setup, he noted.

“Instead of participation, we prefer one more year of the call premium at maturity,” he said.

“This one, which is built around the leverage, may not give you a great return. The underlying has been down. What are the odds that it turns positive but also rises fast and high enough to outperform the market over the one-year period?”

HSBC Securities (USA) Inc. is the underwriter.

The notes priced on Oct. 14 and will settle on Thursday.

The Cusip number is 40439JQA6.

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