HSBC’s $17.52 million trigger autocalls on S&P 500 aimed at moderately bullish investors

Chicago, Nov. 2 – HSBC USA Inc.’s $17.52 million of 0% trigger autocallable notes due Nov. 2, 2023 tied to the S&P 500 index provide a balanced risk-adjusted return for investors with modest return expectations along with another benefit: the exposure to the S&P 500 index alone, advisers said.

The notes will be called at par plus 7.65% per year if the index closes at or above its initial level on any quarterly observation date after six months, according to a 424B2 filing with the Securities and Exchange Commission.

If the notes are not called, meaning the index has finished below its initial level, the payout at maturity will be par unless the index finishes below the downside threshold, 80% of the initial level, in which case investors will lose 1% for each 1% decline of the index from its initial level.

Location, location

“This is not a worst-of, which makes it more attractive,” said Tom Balcom, founder of 1650 Wealth Management.

“It’s a modest return. Best case scenario, 15% in two years. But you have the downside protection.”

The main decision consists of allocating the note to the proper portion of the portfolio, he said.

“Are you going to use it as equity replacement? I don’t think so. The 7.65% return is not enough for the equity bucket,” he said.

The range to possibly outperform the market, which is between minus 20% and plus 7.65%, was also too narrow for an equity allocation, he noted.

“But I can see how someone may want to use it as fixed-income replacement. The coupon is high enough. I could see this as high-yield replacement given the risk,” he said.

Barrier, term

Balcom questioned the depth of the protection.

“You need to feel comfortable with the barrier. Do you have enough protection over the term? Is 20% sufficient over the course of two years?

“I’m not sure. The Fed is expected to raise interest rates next year. Typically, there’s a 12-month period between a rate hike and a recession. If we do have a recession, 20% is probably not enough for that timeframe.”

Adjustments

Ideally, investors would want to increase the duration of the note, he said.

“If you make it a three-year, the 20% barrier looks already a little bit better. If it remains a two-year, you’d want to increase the size of the barrier.”

Issuers are not able to improve all the terms at the same time, such as raising the coupon, extending the maturity and lowering the barrier at once, he noted.

“You have to pick and choose what’s important for you.

“As it is, my concern would be the barrier. Twenty percent is not enough for a two-year note,” he said.

Straightforward

Donald McCoy, financial adviser at Planners Financial Services, said he liked the single underlier.

“It’s on the S&P. That’s the only exposure you have. I like that better than a worst-of,” he said.

“It makes it easier to communicate to a client what the product is doing. Clients do not like too much complexity in a note,” he said.

“This one is pretty straightforward, easy to comprehend and to explain.”

Mildly bullish

Investors in the notes should not be too bullish, he added.

“This is a product for one of those reticent investors concerned about a pullback but not necessarily a significant crash,” he said.

The note is also not designed for investors with high market return expectations.

“If you look back, the S&P 500 has averaged 19% a year over the past five years. A 7.65% is much more muted,” he said.

“If you’re bullish on the S&P, you’re not going to buy this.

“But if you think we’re heading towards an environment of low returns, which is a reasonable expectation, then at least you’re getting 7.65% and the downside protection.”

The protection, by virtue of its contingency, was not perfect, he added.

“If the S&P drops more than 20%, you take the full loss. That’s the risk. But it’s a tradeoff. Getting a 30% protection would obviously cut your upside,” he said.

No bears

Investors in the notes cannot be too pessimistic either, he said.

“If you anticipate a catastrophic scenario in two years, then this is not the right product for you.

“Let’s say we have a 22% decline in the beginning of 2022. People panic for whatever reason. It’s fairly reasonable to think that the market will recover in the next 18 months, at least close to flat,” he said.

“Valuations are stretched, analysts say. But even in 2000 or in 2008, the market recovered quite rapidly.”

The autocallable feature was likely to make investors feel more comfortable with the downside risk.

“You’re probably going to get called in six months unless a correction occurs.

“So overall, I think it’s a fairly reasonable note,” he said.

HSBC Securities (USA) Inc. and UBS Financial Services Inc. are the agents.

The notes will settle on Wednesday.

The Cusip number is 40390L800.

The fee is 1.5%.

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