HSBC’s autocalls with step-up premium on Russell to be used as repair strategy, adviser says

By Emma Trincal

New York, Oct. 26 – HSBC USA Inc.’s 0% autocallable barrier notes with step-up premium and digital upside return due Oct. 29, 2026 linked to the Russell 2000 index could be used as a risk control strategy as well as an income play in a sideways market, said Jonathan Tiemann, president of Tiemann Investment Advisors.

The notes will be called at par plus a 7.7% annual call premium if the index closes at or above its initial level on any annual call observation date, according to an FWP filing with the Securities and Exchange Commission.

If the notes are not called and the index return is greater than 25%, the payout at maturity will be par plus the index return. If the index return is greater than zero but less than or equal to 25%, the payout will be par plus a digital return of 25%. If the index return is less than or equal to zero but greater than or equal to negative 25%, the payout will be par. If the index return is less than negative 25%, investors will be fully exposed to the decline of the index.

Fourth call

Tiemann noticed that the 25% digital payout at maturity was inferior to an equivalent call premium on the fifth year, which would have been 7.7% multiplied by five years, or 38.5%.

“You’re really kind of hoping this index will be going negative until the end of year four,” he said.

The premium on the fourth call date is 30.8%.

“That’s when you get paid the most, even though your return on an annualized basis remains 7.7%.”

Range-bound play

This adviser said he was trying to understand who may benefit from the notes.

“It’s an interesting one. Are you trying to hedge out a position on the Russell? I don’t think that’s really what it’s all about,” he said.

A sideways scenario would provide a positive result for noteholders.

“If it’s up 10 basis points and you get called at 7.7%, you’re doing pretty well. But that only works if the market does not move up too much.

“Because if it has a big gain, say if it’s up 25% next year, you get called and you make 7.7%. That’s a problem,” he said.

Repair strategy

Tiemann thought a more rational use of the notes may be for risk mitigation purposes.

“This could be for someone who expects a short-term market decline but positive returns over the long-term,” he said.

The bet would be on a long-term recovery.

“The market sells off at first but over the course of five years you believe it will be going back up,” he said.

The market over five years could end up being relatively flat if the initial pullback is followed by a rally. Investors taking this bet would be rewarded by the 7.7% premium, he explained.

“It’s some kind of a repair strategy,” he said.

Great memory

“Obviously you’re willing to give up some short-term upside to benefit from it.”

The memory feature applied to the call premium was important to make the strategy work.

“The fact that you can cumulate the premium certainly helps. When there’s a downturn, you don’t know when the market is going to go back up. Here, you have several opportunities to get even and pocket this 7.7% return. This is a recovery strategy keeping with the view that at some point, the market will be up.

“Of course, if you’re a lot wrong, if the barrier is hit, you’re in trouble. But so is everybody else,” he said.

Low expectations

Another adviser said he did not see how a bet on a range bound market could be beneficial to investors as it created too much risk both on the upside and on the downside.

“To me it’s not at all that appealing,” said Kirk Chisholm, wealth manager and principal at Innovative Advisory Group.

“The Russell could be down. You would be missing the call and wait for five years without getting paid anything at all,” he said, pointing to the par scenario when the index finishes negative but at or above the 75% barrier level.

“Worse: if it’s down at the end, you lose at least 25%,” he said.

This adviser said his outlook on U.S. small cap was more bullish than the range-bound view embedded in the notes.

“You’re basically expecting that the market will be flat.

“When I invest in something, especially over a five-year period, I expect to see it going up. I don’t put my money at risk just for a 7.7% return.

Not enough protection

“I don’t think this market is going to go sideways. I guess that’s the bottom line. You take the risk of underperforming the market. If the Russell is up a lot, you make 7.7%. That’s not a very good outcome,” he said.

Even the downside protection was problematic in his opinion.

“If I have to take equity risk, I want a decent protection. A 25% barrier is not going to protect me.

“If the index is going up a lot, it’s not going to benefit me.

“I don’t see how this thing would work for me,” he said.

HSBC Securities (USA) Inc. is the agent.

The notes were expected to price on Oct. 26 and to settle on Oct. 29.

The Cusip number is 40439JQF5.

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