HSBC's $6.3 million notes tied to Euro Stoxx 50 intrigue for high leverage, modest size

By Emma Trincal

New York, Jan. 2 - HSBC USA Inc.'s $6.3 million offering of 0% trigger Performance Leveraged Upside Securities due Dec. 28, 2015 linked to the Euro Stoxx 50 index, despite its small size, was noteworthy for its unusually high leverage factor, sources said.

The payout at maturity was par plus 500% of any gain in the index, up to a 60% cap, according to a 424B2 filing with the Securities and Exchange Commission.

Investors would receive par if the index fell up to 15% and would be fully exposed to losses from the initial level if it dropped more than 15%.

"Five times leverage on the upside: I haven't seen it a lot. But you can make five times leverage. You just have to lower the cap. Or reduce the protection. Most of our clients for a three-year would want a 65% barrier. But for that, they'd get a two-and-a-half or three times leverage," a market participant said.

"It seems like a fair payout."

Digital-like

With a 60% maximum return, or the equivalent of a 20% annualized cap, the structure offered some obvious appeal, a structurer said. But it could really be another way to package a digital payout, he explained.

"If you have infinite leverage, if the Euro Stoxx is above par, you get 60%. It's interesting for someone who is bullish," he said.

"But you could also get a much higher cap with 150% or 200% leverage.

"With this structure, the leverage is so high, we are very close to a digital payout.

"It also depends on the market direction. You could earn more with a 700% gearing and a 50% cap for instance.

"Basically it means that it's a binary option."

Cheap option

The "market parameters", he continued, such as low interest rates and a high dividend rate on the Euro Stoxx index, facilitated pricing.

"The forward for this index is probably below par," this structurer said.

"If the forward of the Euro Stoxx is going to be below 100%, it means that the call option will be pretty inexpensive. I'm not saying it's a drawback. But because the call is out of the money, the option is very cheap. This will allow a very high leverage factor, and if you're bullish on this underlying, it makes sense to benefit from the market parameters.

"It could very well be the beginning of a new trend, some sort of alternative to a digital. But I'm not very impressed by the leverage factor. It's only a consequence of the market parameters, which allow leverage to be what it is."

A test

One surprising aspect of the issue was its $6.3 million size. But sources attributed the Dec. 21 pricing date, just before Christmas, to the modest size.

"Six million is surprising, but it's probably because of the period of pricing. This time of the year doesn't offer the opportunity to get a huge amount of money, plus you have to be bullish on the Euro Stoxx," the structurer said.

"It's a good trade. They didn't get the focus the week before Christmas," the market participant agreed.

"At this time of the year though, $6 million is still a decent size.

"It must have been a test on their part. I would expect to see a repeat of that trade. They could add more volume in January."

The notes (Cusip: 40433T497) carried a 2.5% fee.

HSBC Securities (USA) Inc. was the agent. Morgan Stanley Smith Barney LLC handled distribution.

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