HSBC's buffered performance plus securities tied to the Dow to attract various types of bulls

By Emma Trincal

New York, Sept. 1 - HSBC USA Inc.'s upcoming 0% buffered performance plus securities due March 30, 2015 linked to the Dow Jones industrial average should appeal to a wide range of bullish investors who are looking for growth and a chance to outperform the equity market, sources said.

If the index return is greater than or equal to zero, the payout at maturity will be par plus the greater of the index return and the 25% to 28% minimum upside return, according to an FWP filing with the Securities and Exchange Commission.

Investors will receive par if the index declines by 10% or less and will lose 1% for every 1% that it declines beyond 10%.

For bulls

"If you're expecting flat to minimum type of growth for the next few years, it looks really appealing," said Matt Medeiros, president and chief executive at the Institute for Wealth Management.

The structure may appeal to a wide range of bulls, especially those with a moderately bullish outlook on the market.

"Not that many people are expecting higher-than-normal equity returns over the next few years," he said.

"The minimum coupon they're offering is perhaps a little bit better than many expectations people may have about the market.

"If you have a reasonable return on equity over that period of time that's locked in, it seems very attractive."

Comprehensive structure

The structure was perceived as attractive because it combined several elements not always bundled together in the same product.

"This comes with nice features we don't see so often," said Steve Doucette, financial adviser at Proctor Financial.

"How often do you see unlimited upside return with a buffer on the downside and the real possibility to outperform the market?"

As stated in the prospectus, as long as the Dow finishes below the minimum upside return at maturity - 25% to 28%, or 7.15% to 8% per year - the securities will outperform the index.

In addition, the very bullish type of investor would not be penalized by a cap as there is none, noted Doucette.

"You're just long the market if the index exceeds the minimum payout," he said.

On the downside, the existence of a 10% buffer also gives investors an edge compared to a direct investor in the index, he said.

"I do like the concept," he said. "It's a simple structure, and it kind of makes sense for a bullish investor."

Medeiros also liked the structure, especially because investors are entitled to the minimum return even if the index barely goes up.

"I think this is the type of structure that makes structured products an interesting proposition," said Medeiros.

"You have exposure to an attractive, undervalued asset class. The structure is not complex, which is a real plus. You can eventually outperform the market. And you have a sense of security knowing in advance what you're going to make, worst-case scenario."

Blockbuster last week

Morgan Stanley priced last week a very similar deal with its $78 million of 0% buffered jump securities due Feb. 27, 2015 linked to the S&P 500 index. The tenor and the 10% buffer were identical in both deals.

However, the underlying differed as well as the minimum upside return, set at 42% by Morgan Stanley, or a higher potential annualized gain of 12%.

"That's quite a difference in the minimum return since last week," Doucette said.

"I guess the market was quite volatile back then. It might also boil down to the difference in [credit default swap spreads]."

Morgan Stanley's five-year CDS spreads are 275 basis points, compared with 117 bps for HSBC.

Doucette, who often sells structured products on the secondary market or buys them with shorter tenors - said that one of his objections to the deal was its duration.

"The only way you can lose is if the market is up a lot prior to maturity," he said.

"For instance, if after a year and a half the Dow is up 80% and you get to liquidate your notes at a discount ... that's the only downside to this deal.

"I know that many investors buy structured notes thinking 'I'm going to hold it until it matures.' But if the index surges, you want to be able to take whatever you want off the table."

The notes (Cusip: 4042K1MZ3) will price on Sept. 27 and settle on Sept. 30.

HSBC Securities (USA) Inc. is the agent.

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