HSBC’s trigger PLUS linked to Euro Stoxx 50 feature eye-catching eight-times upside leverage

By Emma Trincal

New York, July 23 – HSBC USA Inc. surprised some buysiders with the announcement of a note carrying an unusually high upside leverage factor of eight.

HSBC’s 0% Trigger Performance Leveraged Upside Securities due July 27, 2018 linked to the Euro Stoxx 50 index will pay at maturity par of $10 plus 800% of any fund gain, subject to a maximum return of 40%, according to an FWP filing with the Securities and Exchange Commission.

Investors will receive par if the index falls by up to 10% and will be fully exposed to losses if the index finishes below the 90% trigger level.

Unheard of

“It’s amazing!” said Steve Doucette, financial adviser at Proctor Financial

“How they do eight times leverage with a 90% barrier, I have no idea. ...

“We’ve never seen leverage at these levels before.”

Matt Medeiros, president and chief executive of the Institute for Wealth Management, expressed the same surprise.

“I have never seen eight times,” he said.

“Everything has been two times or less.”

Alpha

The 40% capped return over the three-year term would represent a potential annualized return of 11.9% with compounding. To achieve this level, the Euro Stoxx 50 index would only have to increase by 5% in three years, or by 1.67% per year taking compounding into account.

“If the index return is less than 12% per annum, you’re in the money. It’s an interesting structure,” said Medeiros.

Doucette said he likes the notes for the opportunity they give investors to outperform the market, which is one of his main criteria when selecting a note.

“Someone buying this would have to believe that the market is going to be range bound in the next three years. It’s an opportunity to outperform in either direction,” he said.

“You’re certainly not bullish, and you are mildly bearish.”

Upside formula

The highly leveraged upside makes it easy for investors to reach the cap. But Doucette does not see this as a real drawback. Instead, he said he might use the leverage as a token to renegotiate the payout.

“The hard part is if the market goes up 5% during that time, you’re capped,” he said.

“I’d probably back off a little on the leverage and see how much I can get that cap up.

“But even if I’m capped out, I can considerably outperform the market.”

As an example, if the Euro Stoxx 50 were up 10% a year, finishing up 30% at maturity, the notes would outperform the index by 10 percentage points.

“Even if it’s up a small percentage, you will outperform too. Especially if it’s up by a small amount. It’s an interesting note,” he said.

If the market were down, however, the notes would be difficult to redeem prior to maturity.

“You won’t be able to sell the notes back for nearly that. You’re sort of stuck with it in a down market.”

Asset allocation

Medeiros said that the investment theme is attractive.

“I do like the underlying asset class. I’m optimistic about the Euro Stoxx over the next few years,” he said.

“With that in mind, my preference would be to see a little bit more of a protection on the downside.

“But with the anticipation of the asset class having modest growth over the next three years, while this is on the edge of my comfort level, I would think the barrier is still acceptable as long as my investment is based on a modest return scenario.”

The leverage is not the only attractive feature of the notes, he said.

“You definitely have the return enhancement, but it’s also linked to a compelling asset class.

“The cap – it’s nearly 12% – is reasonable.

“This is quite interesting.”

HSBC Securities (USA) Inc. is the agent. Morgan Stanley Wealth Management is distributor.

The notes will price Friday and settle July 29.

The Cusip number is 40434E697.

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