HSBC, Bank of America offer short-term bullish bets on Euro Stoxx 50 with full downside risk

By Emma Trincal

New York, Jan. 21 - HSBC USA Inc. and Bank of America Corp. have each announced plans to price relatively short-term notes designed for investors who are bullish on Europe and who want uncapped returns even if the structure excludes any downside protection.

Both products give investors exposure to the European stock market via its main large-cap benchmark, the Euro Stoxx 50 index.

The first product, HSBC's 0% performance securities due Jan. 31, 2017, offers upside leverage at a rate of 1.85 to 1.95 times, and investors will be fully exposed to any losses. The exact participation rate will be set at pricing, according to an FWP filing with the Securities and Exchange Commission.

The second product, Bank of America's 0% market-linked step-up notes due January 2016, provides a form of return enhancement delivered via a digital payout.

If the index finishes above the step-up value, 116% to 120% of the initial level, the payout at maturity will be par of $10 plus the index return, according to an FWP filing with the SEC.

If the index finishes at or above the initial level but is less than or equal to the step-up value, the payout at maturity will be par plus the step-up payment of 16% to 20%.

Investors will be fully exposed to losses if the index return is negative.

The exact step-up value and step-up payment will be set at pricing.

For all bulls

The step-up note is particularly well suited for a mildly bullish investor, said Dean Zayed, chief executive of Brookstone Capital Management.

"Both notes are attractive if you have a bullish view or even a modestly bullish view on Europe," he said.

"They give you an opportunity to do better than the index or the [exchange-traded fund]. The downside is the same, and the upside is giving you something more.

"But the step-up note is especially attractive in a moderately bullish scenario. If you anticipate the European equity market to generate single-digit or low double-digit returns, the digital coupon is very appealing in this type of environment. After a big year in 2013, performance may be a bit muted this year even if it remains positive, in which case getting the step-up return would be a very good thing. You would outperform the index without being exposed to any more risk."

The same logic applies to the leveraged return notes, he said.

"Europe is poised to do well, but even if growth remains modest, the leveraged exposure on the upside will allow you to outperform the index itself. You don't have downside protection, but you don't have any more downside risk than if you were long the ETF," he said.

Leverage for strong bulls

Steven Foldes, president of Foldes Financial Management LLC, said that he prefers the HSBC structure based on his market outlook for Europe.

"I like both of them," Foldes said.

"But I like the first one better because you enjoy the leverage on the upside with no cap. As a result, you're looking at potentially big benefits. You're getting almost twice the result of the index.

"We like the leveraged note better because our view is more bullish on Europe."

Lower valuations in Europe than in the United States along with the conviction that "over time, Europe will improve" are the main reasons behind his bullish outlook, he said.

The HSBC notes do not offer any downside protection, but the "1.9 times" leverage and the absence of a cap make the structure very compelling, in his opinion.

"That's what structured notes are all about: enhanced return, no cap. I like it a lot," he said.

The Euro Stoxx 50, while more concentrated than the broader benchmarks Foldes typically prefers to get exposure to, is still a "fine" index, he said.

"We see it as a European version of the S&P with a bit more concentration," he said.

"HSBC is a fine institution. It certainly meets our credit criteria.

"The fact that this note has no cap and that you can get nearly two times the index performance at maturity, for us, is terrific. That's the kind of terms that offers value to our clients."

The leverage enables investors to outperform the benchmark, he said.

"Compare it with an ETF. It's a long-only exposure with 1.9 times leverage versus a long-only exposure with no leverage. It's superior to the ETF," he said.

"It's also superior to a leveraged ETF because unlike the ETF, the leverage applies to the upside only."

Credit risk, dividends

For investors, the trade-off is giving up dividends and getting exposed to credit risk, he noted.

"Given our research on European banks, we're comfortable with the issuer's credit risk. With respect to the dividends, it's fine with us," he said, referring to the HSBC deal.

Foldes said that he likes the step-up note for the same reason: the enhanced return delivered without a cap. However, the notes are a better match for mildly bullish investors.

"If the Euro Stoxx grows moderately over the next 24 months, you may get benefit from the notes," he said.

"This one makes sense if your bullish outlook is very modest because above the step-up level you get nothing but a long-only exposure.

"You can get 20% if the index is up by 1%, that's the digital payoff. But if the asset class does better than that, you just get the index return. There's no real return enhancement beyond the step-up."

The credit risk is also a consideration.

"You're also giving up the dividends, and you get exposure to the credit risk, just like with the other deal. But Bank of America is not one of the banks we're doing business with in the U.S. Having said that, it's a large bank, assuming you are comfortable with the credit quality," he said.

The HSBC notes (Cusip: 40434B388) are expected to price Jan. 29 and settle Jan. 31. UBS Financial Services Inc. and HSBC Securities (USA) Inc. are the agents.

The Bank of America notes are set to price in January and settle in February. BofA Merrill Lynch is the agent.

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