HSBC’s $18.74 million autocall trigger PLUS on S&P generate positive feedback from advisers

By Emma Trincal

New York, June 6 – HSBC USA Inc.’s $18.74 million of 0% autocallable trigger Performance Leveraged Upside Securities due June 5, 2024 linked to the S&P 500 index brought positive comments from advisers as the terms offer two attractive ways to generate positive returns, a sizable barrier and a short duration.

If the index closes at or above its initial level on June 7, 2023, the notes will be called at par plus a 12.5% call premium, according to a 424B2 filing with the Securities and Exchange Commission.

If the index finishes at or above its initial level, the payout at maturity will be par plus 125% of the gain.

If the index falls but finishes at or above the 75% trigger level, the payout will be par.

Otherwise, investors will lose 1% for each 1% decline from initial level.

Better than long equity

Carl Kunhardt, wealth manager at Quest Capital Management, was impressed by the terms.

“I love the note. The upside is tremendous, and they give you a very generous barrier on the downside,” he said.

“The only issue is that in one year, if you’re negative, you’re in catch-up mode. But that would be the case if you held the position long anyway. That’s always my main criteria. Am I better off with the note versus holding the security long? It looks like the answer is obvious with this one. The note gives me an edge.”

The payout if the notes are called was rewarding.

“You’ll get 12.5% in one year even if the market is flat or slightly up. That beats my 8.5% return expectation,” he said.

“If you miss the opportunity, if you hold the notes for two years you still have 1.25x the upside with a 25% protection on the downside and no cap... these are things you don’t get being long the index.

“I see a whole lot of advantages holding this structured note. I’m not really seeing any disadvantages.”

Credit, underlier, fee

Another financial adviser echoed Kunhardt’s point of view.

“This is really, really good,” he said.

Looking first at the “basics,” he said he was comfortable with the issuer’s creditworthiness and the use of the S&P 500 index as the underlier.

“It’s also not a worst-of. There is no ambiguity there, no complicated explanations,” he said.

The potential return in two different types of payoffs and separate timing was unusual but not overly complicated, he said.

“You can explain that to clients. You either get called in one year or you participate in the index performance at maturity.”

One negative point was the 2.5% fee amount, as disclosed in the filing.

“It’s high for a two-year especially since it could be as short as a one year. But the terms are very good,” he said.

Call premium

This adviser said the issuer had done “a good job” at explaining the different payoff scenarios in the diagram.

“The first scenario if you get called gives you 12.5% a year. That’s pretty darn good,” he said.

The odds for such an outcome were in the investor’s favor, he noted, commenting on back-testing data he collected on the S&P 500 index since 1950.

“The S&P finished positive over a one-year rolling period 74% of the time going back to 1950. This gives you a very good chance of being taken off in one year with 12.5%,” he said.

Such return, he said, fully met his expectations.

“When you take equity-type of risk you want to be able to get equity-types of returns, which to me should be around 10%. So, I have no problem taking 12.5% and putting it in my pocket,” he said.

Market-dependent

The “maturity scenario,” which triggers a growth note, was harder to predict.

“I don’t really have the statistical tools to measure the chances of finishing positive within a two-year period when the index is negative after a year,” he said.

The leverage multiple can only do so much, he added.

“If you’re up at maturity, you’ll need a return significant enough to make the leverage worthwhile. If for instance the index is up 5% giving you 6.25%, that’s no big deal. You barely make up for the lost dividends. But if we have a strong rebound in the second year, if it’s up for instance 20%, you’re getting 25%...now that’s a nice outperformance.

“The good news is you have a pretty good likelihood of a rebound after a negative year,” he said.

Downside protection

This adviser said he also liked the 75% barrier.

Using his back-testing data on the S&P 500 index, he found a 2.3% chance of a drop of 25% or more over a 12-month period.

“That’s not likely. Over a two-year period, you’re talking 4.2%. Not very likely either.

“So, yes, there is a chance that you could breach the barrier, but it’s not significant,” he said.

Even if the barrier was breached, the note would only underperform the market by the yield, which is 1.9%, he added.

“Now again, from a statistical standpoint, when the index is down after one year, it’s hard for me to assess the odds of a negative return at the end of the second year. But it doesn’t appear to be significant from the one- and two-year back-testing results.”

Good pricing

Overall, this adviser was surprised about the issuer’s ability to offer those terms over a short period of time, especially without capping the upside.

“You wonder how they could even price this thing given that the fee is not even low.

“It’s a short-term note. It’s not a worst-of. Your call premium is a double-digit return if you get called after one year. At maturity you benefit from a defensive barrier on the downside plus no cap and leverage on the upside.

“Perhaps the call is what allows them to price those terms at maturity since it reduces the chances that you would end up benefiting from the uncapped leveraged return. But I don’t mind getting called with a 12.5% premium,” he said.

The chances of outperforming the index with the call premium were significant: over one-year rolling periods, the index finished positive and below 12.5% 58% of the time, he noted.

“This is a very nice offering,” he said.

“I’m hard-pressed to find too many flaws with this note other than the fee.”

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

The notes settled on Friday.

The Cusip number is 40390L370.

The fee is 2.5%.

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