HSBC’s trigger PLUS with no cap tied to S&P 500 less risky alternative to long-only position

By Emma Trincal

New York, Dec. 15 – HSBC USA Inc.’s 0% trigger Performance Leveraged Upside Securities due Jan. 3, 2024 linked to the S&P 500 index offer long-term investors an attractive alternative to the index fund, said Suzi Hampson, structured products analyst at Future Value Consultants.

If the index finishes at or above its initial level, the payout at maturity will be par plus 131.45% of the gain, according to an FWP filing with the Securities and Exchange Commission.

If the index falls but finishes at or above the 65% trigger level, the payout will be par.

Otherwise, investors will lose 1% for each 1% decline.

Barrier versus dividends

“For buy-and-hold investors, you’re getting a significant amount of protection. Where else would you get 35% in contingent protection? The gains are uncapped. The only concession you would need to make compared to a long-term exposure to the index is the no-dividend payment over six years,” Hampson said.

“Of course there is also the exposure to HSBC’s credit.”

But overall the tradeoff offers benefits an exchange-traded fund could not have – asymmetrical leverage on the upside and protection on the downside, she said.

“The 65% barrier is quite deep,” she said.

“Structured products can be used that way all the time: you get the exposure to the equity market with less risk.”

Stress testing

Future Value Consultants produces stress testing reports for structured notes. Each report brings a forward-looking Monte Carlo simulation based on the underlying’s volatility and assumed growth rate. Clients can choose from 29 different tests or “tables.”

One of those tests, the capital performance table, shows the probability of all possible outcomes, which for this simple structure are limited to three. Those are: “return more than capital” when the index closes above its initial price; “return exactly capital,” if the S&P 500 finishes negative but above the barrier; and “return less than capital in the barrier breach scenario.

Market assumptions

The firm runs its tests based on five different market scenarios. The neutral one is the basis for pricing and derives from the risk-free rate. It is not used for prediction purposes. The other four are bull, bear, low volatility and high volatility. They are all based on a common volatility level and variable growth rates.

The firm uses conservative performance assumption. For instance, the S&P 500 index in this test is expected to grow 6% a year in the best scenario, which is the bull.

Likely to win

Investors have an 84% probability of getting a positive return from the notes on this market scenario, according to the table.

The odds of getting less than par are only 4%. Getting one’s principal only happens 12% of the time.

“This 12% probability is what distinguishes this product from an ETF. It really represents the value of the barrier. Twelve percent of the time, you’ll get your money back while it would be a loss with the ETF. You’d rather get your money back than lose. This probability helps you value the benefit of the barrier.”

Hefty losses

“Most investors will use the bull scenario, which is the one we will expect to be the best since the notes are long-term and there is no cap,” she said.

“Within this scenario, you have a very good potential for high growth.

“The probabilities of losing money are slim due to the deep barrier.”

However, deep barriers have their downside. When losses happen, they are by definition elevated, she noted.

The capital performance table also shows average payoffs. If an investor loses principal with the product, the average loss will be 54%. When money is made, the average positive return is 74% over the term.

Looking back

The following table in the report provides back tested outcomes over three different time frames – the last five, 10 and 15 years.

“The last five years in a full bull market are showing exceptional results,” she said.

The back tested outcome for a positive return has a 99.5% probability. It drops to 85.3% in the past 10 years and 76% over the past 15.

“You don’t want to be misleading. Back tested statistics never indicate that what happened will happen again.

“But using together back testing and forward-looking probabilities give you an idea.

“Overall this product looks good. It can definitely offer equity exposure with risk mitigation, an advantage compared to an ETF. But you have to be willing to have a six-year horizon for your investment,” she said.

HSBC Securities (USA) Inc. is the agent.

The notes will be guaranteed by Morgan Stanley.

The trade date is Dec. 28.

The Cusip number is 40435J836.

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