HSBC’s buffered accelerated leveraged notes on stock basket offer bet on travel pickup

By Emma Trincal

New York, Jan. 26 – HSBC USA Inc.’s 0% buffered accelerated market participation securities due Feb. 1, 2023 linked to an equally weighted basket consisting of the stocks of Delta Air Lines, Inc., MGM Resorts International, Marriott International Inc., Booking Holdings Inc. and Carnival Corp. are designed for investors who expect a modest pickup in demand for travel once the economy rebounds, advisers said.

The payout at maturity will be par plus double any basket gain, subject to a maximum return to be comprised between 26% and 28%, which will be set at pricing.

Investors will receive par if the basket declines by 15% or less and will lose 1% for each 1% decline beyond 15%.

Rally is on

Kirk Chisholm, wealth manager and principal at Innovative Advisory Group, said the timing may not be the most opportunistic.

“A lot of the recovery has already priced in. These stocks have already gone up a lot from their lows. I’m not expecting a huge upside. They’re pricing a full recovery when we’re not even there,” he said.

Stocks like MGM Resorts and Booking Holdings are near their highs of early last year. The same is not true of cruise ship Carnival Corp., which lost 60% in the past 12 months. However, its share price has gained 36% in the past three months. Delta Air Lines dropped 31% in the past year but has jumped 125% since its bottom in May. The price of Marriott, while still down 15% for the past year, has nearly tripled from its low of March.

Not there yet

These valuations shed a light on how hard the Covid-19 pandemic has hit the sector.

“Global travel has been on hold for a long time now,” he said.

“These are all international companies so even if we have a recovery here in the U.S., how about the global economy? Profits have plummeted. A lot of businesses are out of business. A lot of people are unemployed. It’s not the economy we had in January last year, which was at its peak.”

Chisholm said he is not necessarily ruling out a recovery.

“But the optimistic expectations created by the vaccines have already priced.

“Investors have been buying the rumor. When people take vacations again, you sell the news. Where do you go from there?

“I’d rather have more buffer. I’d be willing to trade in some of the leverage for more protection. In fact, I don’t even think you need the leverage.”

No cap, please

Another financial adviser said he would rather own the stocks themselves if he wanted to bet on international travel resuming after the coronavirus pandemic.

“If I wanted to do this, I would not want to be capped,” said Jeff Pietsch, founder of Eastsound Capital Advisors.

“Given the recent advances, the odds of getting the cap are high.”

The notes pay a maximum return of 12.3% to 13.2% on an annualized compounded basis. A modest growth of 6.3% to 6.8% a year would allow investors to reach those caps.

“The downside protection even with the buffer is relatively small.

“I’d rather wait for a 15% pullback, buy the shares and sell at my choosing,” he said.

But Pietsch’s main objection centered on the economics of the notes, which carry a 3.25% fee, according to the prospectus.

“That seems really expensive to me,” he said.

Collar

Jonathan Tiemann, president of Tiemann Investment Advisors, said the trade could be replicated with stocks and options.

“You’re getting the two times leverage with a cap. You have to hold it for two years. A lot can happen over the course of two years,” he said.

“You’re getting the buffer by selling the volatility, of which there is a lot, and that’s your cap.

“If I really wanted this exposure, if I was interested in creating the same thing – some protection and a cap – I would be tempted to build an option strategy myself.”

He said a collar position could achieve a similar result. A collar is an option strategy, which consists of buying puts to protect a long position in stocks. The puts are financed via the writing of covered calls, which is the equivalent of capping the upside.

The strategy could be applied to each of the five stocks although pricing a basket option, which is what the note accomplishes, is cheaper than pricing five different collars on each stock.

“I don’t have access to the implied pricing of the basket, but this exposure is presumably more cost-effective than having a collection of options for each stock,” he said.

In that regard, the structured note may be of help.

“You would have to have someone doing the basket option for you, and I bet they would show you something quite similar to that note.”

However, the cost of the notes would have to be weighted against that of building one’s own option strategy on each of the five stocks, he said.

“You’d have to see which one makes the most sense,” he said. In such comparison, advisers need to keep in mind that they give up liquidity with the notes.

Alternatively, the same market view could be expressed but with a different underlying.

“You would have to find an ETF that tracks stocks in the same industry. Then you could do it yourself.”

“It makes sense to bet on a pent-up demand for flights, cruises and hotels once the coronavirus crisis is over. But you’ve got to find ways to do that at a lower cost and the more flexibility,” he said.

HSBC Securities (USA) Inc. is the agent.

The notes (Cusip: 40438CS77) will price on Wednesday and settle on Friday.

© 2015 Prospect News.
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