HSBC’s $11.27 million trigger PLUS tied to Euro Stoxx 50 show mind-boggling leverage multiple

By Emma Trincal

New York, Dec. 5 – HSBC USA Inc.’s $11.27 million of 0% trigger Performance Leveraged Upside Securities due April 6, 2021 linked to the Euro Stoxx 50 index are at first glance as ordinary as it gets with a barrier and leverage up to a cap. Except that it offers nearly 10 times the upside.

The payout at maturity will be par of $10 plus 950% of any index gain, up to a maximum return of 52.5%, according to a 424B2 filing with the Securities and Exchange Commission.

Investors will receive par if the index falls by up to 15% and will be fully exposed to any losses if the index finishes below the 85% trigger level.

Moderate outlook

“This is for an investor who feels like European equities will have a very modest price increase in the next three or so years,” said Tom Balcom, founder of 1650 Wealth Management.

Investors will reach their maximum return if the index is up 5.53% for the period based on the leverage multiple, he noted.

“Any return above that and you exceed the cap. With that huge leverage you’re going to cap out,” he added.

But investors in this product would not mind the cap, which is about 13.5% a year on a compounded basis.

“Would you be upset to get that type of return? Most clients are comfortable with that,” he said.

A more bullish client however would want more.

So far this year, the Euro Stoxx 50 index is up more than 22%.

Downside and dividends

“I like it. If the index is flat or negative you have the protection,” he said.

Investors however must give up a high dividend yield of 3.35%.

“The leverage on the upside obviously will more than make up for it. It’s on the downside that you may end up lagging behind. If the index is flat or if it breaches, you will underperform because of the dividends,” he said.

Overall, Balcom said he liked the notes. He recently did a similar trade but somewhat in reverse.

“It was a higher cap and less leverage. This one is more leverage and a lower cap.

“It all boils down to your expectations,” he said. “If you’re not very bullish this note makes sense.”

Still for bulls

Donald McCoy, financial adviser at Planners Financial Services, said the notes were attractive for the mildly bullish investor.

“This is for someone who clearly believes we’re going to have muted returns in the near term,” he said.

“If you think the index is not going to do much, you’re better off using that leverage to boost your return.

“But what’s interesting is that based on the leverage and cap they’re giving you, even if you were more bullish you would find the product appealing. Being able to get 52.5% over a little bit more than three years is pretty significant.

“This 9.5 x leverage is a good way to juice these returns.”

The dividend loss was a concern only in a downside scenario.

“It’s a significant amount of dividend you’re giving up. But you’re getting a lot of leverage. So if the index is up 10% at the end, you’re getting 52.5% instead of 10% plus dividends.”

Noteholders may not be able to use the dividends as a cushion against losses. But the 15% contingent protection could help outperform the index over a certain range.

“It seems like a pretty good deal if you’re bullish to modestly bullish on Europe,” he said.

HSBC Securities (USA) Inc. is the agent, with Morgan Stanley Wealth Management handling distribution.

The notes (Cusip: 40435H137) priced on Nov. 30.

The fee is 3%.

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