HSBC's PLUS linked to ETF and two indexes offer leverage, easy access to global equities

By Emma Trincal

New York, March 18 - HSBC USA Inc.'s 0% Performance Leveraged Upside Securities due April 23, 2012 linked to a basket of two indexes and one index fund are designed for investors looking for a convenient and cheaper way to leverage up a global equities basket.

But the trade-off is added risk, said structured products analyst Suzi Hampson with Future Value Consultants.

The basket includes the S&P 500 index with a 60% weight, the Russell 2000 index with a 20% weight and the iShares MSCI EAFE index fund with a 20% weight, according to an FWP filing with the Securities and Exchange Commission.

If the final basket value is greater than the initial basket value, investors will receive par plus 300% of the basket return, subject to a maximum payment of $11.60 to $11.70 per $10.00 principal amount. The actual maximum payment will be determined at pricing.

Investors will be exposed to any decline in the basket value.

Risk

"This is a risky product given the absence of any buffer," Hampson said.

"But there is no more risk than investing directly in the funds. It simply has more risk than your typical structured product, which usually has a buffer or a barrier."

In exchange for the additional risk, though, investors gain convenient access to a leveraged portfolio, she said.

Access to leverage

"This is for investors looking for a cheaper, easier way to have access to leverage on this portfolio rather than attempting to do it themselves," she said.

"Investors use structured products for two reasons: to manipulate the risk return, for instance, taking a risky asset and putting some principal protection around it; the second reason is to gain easy access to an underlying they may find difficult and expensive to invest in themselves."

Hampson said that investing in the components of the basket would involve fees that would make the cost of a direct investment more expensive than the note.

"You compromise a bit for that because you're accepting the maturity and also the way the funds are allocated," she said.

The product stands at the risky end of product spectrum as evidenced by its 6.20 riskmap, she said.

"An investor in this note has to be happy to take on some risk," she said.

Riskmap is a Future Value Consultants rating that measures the risk associated with a product on a scale from zero to 10.

"The fact that there's no buffer definitely contributes to the high riskmap," she said.

But the leverage and relatively high cap offer a good return profile, she noted.

The return rating, at 5.12, is above the 4.5 average, she said.

Return rating is Future Value Consultants' indicator, on a scale of zero to 10, of the risk-adjusted return of the notes.

Underlying volatility

The level of a cap needs to be assessed in relation to the volatility of the underlying, she said.

The basket for this product has an underlying volatility of 26.67%, which is greater than that of the S&P 500 in the low 20s, she noted.

The higher volatility allows the issuer to give investors a 16% to 17% cap, which is better than what investors might expect from similar notes linked to the S&P 500.

Hampson compared the product with Morgan Stanley's planned 0% PLUS due April 24, 2012 linked to the S&P 500 index. Many of the terms were the same - three times leverage, maturity of one year and no buffer - but the Morgan Stanley product had a lower cap of 11% to 14%, she noted.

"I guess this underlying does allow for a higher cap, which I assume is why it was chosen," she said.

Return score

The probability tables of product return outcomes reflect the above-average return score.

Investors have a 50% chance of generating a gain in excess of 15%. "It sounds like a pretty high probability to hit the cap," she said.

The risk is reflected in a 35% chance of losing more than 5% of principal. "Given the absence of a buffer, that seems reasonable," she noted.

The 7.34 value rating is "quite good," she said.

The value score, on a scale of zero to 10 represents the real value to the investor after deducting the costs the issuer charges in fees and commissions on an annualized basis.

The overall rating, on a scale of zero to 10, is Future Value Consultants' opinion on the quality of a deal taking into account costs, structure and risk-return profile. It's an average of three scores weighted 40% to the value score, 40% to the return score and 20% to the simplicity score.

The 6.68 overall rating is simply "average," said Hampson.

"Even with a return rating above average and a fair value score, we still have an overall rating that doesn't look that good, but it's better than many other structured products. In general, you get an average overall rating with a higher riskmap," she said.

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