HSBC’s $3.27 million phoenix review notes on Meta Platforms introduces Facebook’s new face

By Emma Trincal

New York, Nov. 9 – HSBC USA Inc. priced $3.27 million of phoenix quarterly review notes with a memory coupon feature due Nov. 23, 2022 linked to the common shares of Meta Platforms, Inc., the first deal to use as a single underlying name the freshly rebranded Facebook.

On Oct. 28, Facebook changed its name to Meta Platforms to reflect the company’s new focus on innovation and virtual reality, in particular a long-term metaverse strategy.

Metaverse is a new term designating virtual realities environments used online.

Meta Platform’s stock will begin to trade under the ticker “MVRS” on Dec. 1.

The notes will pay a contingent quarterly coupon plus any previously unpaid coupons at the annual rate of 10% if the share price closes at or above its coupon threshold level, 67.6% of its initial level, on the related determination date, according to a 424B2 filing with the Securities and Exchange Commission.

The notes will be redeemed early at par plus the contingent coupon if the index closes above its initial level on any quarterly redemption determination date.

The payout at maturity will be par plus the contingent coupon unless the final share price closes below the 67.6% trigger level, in which case investors will be fully exposed to any losses.

Competition

“People buying notes on Facebook are familiar with the name. But now they’re rebranding themselves. They have good reasons for doing so. Facebook has been at the center of many controversies,” said Tom Balcom, founder of 1650 Wealth Management.

“They’ve also been losing shares of business to a younger market.

“For twelve-year old kids, Facebook is for their parents or even grandparents. Now teenagers do TikTok. Facebook has lost some of its demographics.”

Worst-of material

On Oct. 29, UBS AG, London Branch priced $2.05 million of five-year autocallable contingent yield notes tied to the worst of four stocks, including Meta Platforms. The others were Netflix, Inc., Alphabet Inc. and Snap Inc.

HSBC’s $3.27 million issue is the first deal based on Meta Platforms as a sole underlier, according to preliminary data compiled by Prospect News.

The stock of the largest social media company in the world is one of the most popular underliers for structured notes. It is mostly used with other stocks in products built as worst-of. The issuance volume of notes linked to Facebook alone is $144 million so far this year via 136 deals.

GS Finance Corp. priced the top three for $14.15 million, $12.25 million and $10.98 million, respectively, according to the data. Those issues are autocallable contingent coupon notes.

“At first, it may be a little bit harder to sell those products with the new name. People are familiar with Facebook. They buy what they know. Meta is a little obscure,” said Balcom.

“But at the end of the day, what investors are really looking for is a decent yield.”

The HSBC should satisfy that quest, he added.

Barrier, entry price

“This is a nice return for income replacement. There’s a bit of uncertainty with Facebook embracing a totally new identity. You probably get a little bit of a premium for that,” he said.

“The 10-year Treasury gives you a return of 1.44% a year. This note can pay 10% in one year if you don’t breach the barrier. That’s a very compelling story for an income investor.

“Of course, you can lose money. But a 33% barrier is a good level of protection for an individual stock especially for a large company like Facebook.”

“The entry price is also slightly more attractive now. We just had a little correction.”

The share price closed at $335.37 on Tuesday, off 12.7% from its all-time high of $384.33 on Sept. 1.

“We don’t buy notes tied to individual names. But if we did, this one would be a good candidate,” he said.

Valuation

Another financial adviser said the structure was relatively compelling although the underlying may not have been the best option.

“Like most tech stocks, Facebook is not cheap,” he said.

“The problem is mostly the high P/E. A lot of these popular names trade at prices that are too high based on their profits.

“However, you could argue that Facebook is not as overpriced as others like Apple, Google or Microsoft. Its P/E ratio is not as inflated.”

One issue for investors is the relatively short history of the stock, he noted. Facebook went public in May 2012.

“Facebook as a stock didn’t exist 10 years ago. We don’t have a lot of data,” he said.

During the Covid pandemic-induced sell-off in February-March of last year, the share price dropped nearly 40%, he noted.

“In the event of a bear market, the stock could show a much bigger percentage drop than the barrier. You always have that risk over one year. But then, the stock might come back by November,” he said.

Achievable return

The memory, which gives investor a chance to receive previously unpaid coupons as long as the barrier condition is met, was one of the best aspects of the structure, he said.

“Even if you never get paid while holding the notes, as long as the stock doesn’t fall by more than 33% at maturity, you’ll catch your 10%. That memory thing, to me, is extremely valuable.”

As with any autocallable note, a range bound view is most appropriate.

“If you want more than 10% you shouldn’t invest in this note,” he said.

“But if you don’t think it’s going to move up all that much, it’s a reasonable way to get 10%.

“The barrier is relatively good; the memory is good. Both features increase the odds of getting paid.”

“There is some downside risk. But there is less risk than with some high-flying stocks because Facebook has been hit recently by negative media coverage. It’s not undervalued. But it’s not the most expensive stock.

“You’re balancing the chances of getting 10% in one year versus the potential for unlimited loss.

“The odds are reasonable,” he said.

HSBC Securities (USA) Inc. is the underwriter, and JPMorgan Chase Bank, NA and J.P. Morgan Securities LLC are the placement agents.

The notes (Cusip: 40439JSC0) priced on Friday and will settle on Wednesday.

The fee is 1%.

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