HSBC’s $1.83 million leveraged notes with autocall on indexes show no cap on short tenor

By Emma Trincal

New York, Oct. 2 – HSBC USA Inc.’s $1.83 million of 0% barrier participation notes with autocall feature due Sept. 29, 2025 linked to the least performing of the S&P 500 index and the Russell 2000 index employ a familiar structure, but the maturity is shorter than usual, which can impact the final payout if the notes fail to be called, advisers said.

The notes will be called automatically at par plus a premium of 11.3% if each index closes at or above its initial level on Sept. 25, 2024, according to a 424B2 filing with the Securities and Exchange Commission.

If each index finishes at or above its initial level, the payout at maturity will be par plus 150% of the laggard index’s return.

If the worst performer declines but finishes at or above its 70% barrier level, the payout will be par.

Otherwise, investors will be fully exposed to the decline of the worst performer from its initial level.

Two-year

“It’s not bad. Usually, we don’t see that many two-year one-time call notes like that,” said Ken Nuttall, chief investment officer at BlackDiamond Wealth Management.

The two indices, S&P and Russell, are typically “pretty highly” correlated, he noted.

“But the correlation has slightly decreased over the past month or two because the S&P has gone crazy, up 11% this year while the Russell has done nothing. But I wouldn’t be too worried about that,” he said.

With the equity market down in September, premiums have been going up recently, he said.

Phoenix with XLK

“Last week, we did a three-year income note with JPMorgan. The yield was a little higher than 11.30% at 12.5% payable monthly. It also was a 70% barrier,” he said.

Investors had exposure to the worst of the SPDR S&P 500 ETF Trust, the iShares Russell 2000 ETF and the Technology Select Sector SPDR ETF.

Nuttall said he likes to substitute the ETF to the Nasdaq-100 index.

“We like XLK. It has a 0.98 correlation with the Nasdaq but it’s more volatile so you can pick up an extra 1.5% yield. We used it in the note,” he said.

“XLK” is the ticker for the Technology Select Sector SPDR ETF.

The notes were issuer callable monthly after six months.

17.75% premium

Nuttall said he also saw a deal similar to the HSBC note but longer in duration.

“It was a five-year Morgan Stanley. We didn’t do it. We didn’t have any clients for it. Yet the notes were interesting,” he said.

The underliers for the worst-of payout were the Dow Jones industrial average, the Nasdaq-100 index and the Russell 2000 index. The autocall premium on the first year was 17.75%. At maturity, investors received 1.5 times the gain with no cap on the upside. The downside showed a 70% barrier.

“Some of the terms are similar to the HSBC one,” he said pointing to the first year autocall, the 1.5x leverage at maturity, the no-cap and the 70% barrier.

One main difference was the higher premium due to the inclusion of the Nasdaq-100, a third and more volatile underlying.

But the five-year maturity was the most significant difference.

Recovery time

“With that five-year deal, if you don’t get called on the first year, you have four years to make up for it. That’s actually a good thing,” he said.

This underscored the weaknesses of the two-year deal from HSBC.

“The only problem with these shorter-dated notes is that if you’re down at the end of the first year, you only have one year to recover. You have to make up a lot. So, you’re really banking on a big gain on the second year,” he said.

Waiting for vol.

Deals were definitely better a year ago when the market hit a bottom, he said.

“Volatility was perfect. It moved in the right direction, and we did a lot of notes then. You could get 20% a year on indices.

“Today I can get in a T-bill at 5% and if a note only gives me 8%, the extra 3% is not worth the equity risk I’m taking. You have to be compensated for it,” he said.

Back testing

Another financial adviser looked at the two-year HSBC note and found the structure “compelling.”

“I sort of like this one. The main thing is that you could get called on the first year at 11.3%. That’s not too shabby. If you don’t get called, you have this uncapped return with a 1.5x leverage. That’s a nice thing too,” he said.

This adviser assesses the risk and reward of a note using back-testing data he has compiled for each index.

“Things can look good at first sight. But I always look at my statistics before reaching any conclusion,” he said.

“In this case, my analysis will be incomplete because I’m looking at these two indices on an individual basis. I can’t run any test on the worst-of. I don’t have that firepower.”

Call, barrier

Looking at one-year rolling periods, he found that the probability of being called on the first year was 73.6% for the S&P and 70.5% for the Russell.

“There is a very high likelihood of getting called. I don’t take into account the worst-of, so there is a little bit of a nuance here. But still. Those probabilities are very high. If you can put 11.3% in your pocket after one year, all is good with the world,” he said.

Switching then to a two-year period, this adviser found that the S&P 500 finished negative only 17.3% of the time. For the Russell, the frequency was 18.5%.

The chances of breaking the barrier were very small – 3% for the S&P and 2.5% for the Russell, he said.

“I am very comfortable with that 70% barrier. It significantly reduces the risk,” he said.

Not for bulls

As a result, the chances of finishing positive were very high, he said.

“The only thing is, since you’re negative on year one, you need a very strong recovery, the type of 1997-98 bull market to make a difference depending on how much lower you finish on the call date after one year,” he said.

“You’re going to be up. There are very good chances that you will benefit from the leverage and no-cap if the notes mature.”

Very bullish investors would not be interested, he said.

“When you’re a roaring bull, you’re not going to buy a structured note anyway because structured notes are capped in order to provide some downside protection,” he said.

But for most investors, the note was interesting.

“It’s a good structure. It caters to where we are in the market,” he said.

HSBC Securities (USA) Inc. is the agent.

The notes settled on Friday.

The Cusip number is 40447AKZ6.

The fee is 2.25%.

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