HSBC’s $38 million lookback notes on S&P suggest renewed interest for this low-entry strategy

By Emma Trincal

New York, Feb. 22 – HSBC USA Inc. priced $38.08 million of 0% lookback trigger Performance Leveraged Upside Securities due Feb. 27, 2025 linked to the S&P 500 index, the largest deal to price last week, according to preliminary data compiled by Prospect News.

The size of the offering may indicate an increased attention for lookbacks, a feature used to help investors get a better entry point for their trade. The structure had lost its popularity due to weak pricing conditions but seems to have enjoyed renewed interest over the past couple of years.

The initial index level for the HSBC notes will be the lowest closing level of the index from the pricing date to April 14, according to a 424B2 filing with the Securities and Exchange Commission.

If the final index level is greater than the initial level, the payout at maturity will be par of $10 plus 150% of the gain, subject to a maximum payout of 21.5%.

If the final level is less than or equal to the initial level but greater than or equal to the trigger price, 80% of the initial level, the payout will be par.

If the final level is less than the trigger price, investors will be fully exposed to the decline.

Smart structure

“Rates are up especially on the short end of the curve, so it helps with pricing. When rates were very low, pricing shorter-dated deals, including a two-year was very expensive. Not anymore. This is perhaps why the notes drew a lot of attention,” said a structurer.

Investors buying those notes will benefit from a short-term surge in volatility so they can strike a better price. A big drop in the index would lower their entry point. But this may not be how volatility is being priced, he said.

“If short-term volatility is low, it makes the lookback easier, less expensive to price,” he said.

“It’s a smart deal from a pricing standpoint and it resonates in the marketplace. The size of the deal makes it pretty clear.”

Reality digested

He explained further his view on volatility expectations near term.

“Most of the bad news and surprises have already been priced over the short term,” he said.

“A two-month lookback is probably a cycle where you don’t expect too many surprises.”

This development may have to do with renewed inflation fears since last week. Inflation data released then along with hawkish Fed comments pointed to persistent inflation leading the market to give up hoping for a pause in rate hikes.

“The market seems to have digested the news, which is why we had this sell-off. Additional rate hikes are now being priced for the next couple of meetings, which leaves little room for surprises and false hopes,” he said.

Moreover, the lookback period is squeezed between the end and the beginning of two earning seasons, which should also contribute to reduce the likelihood of volatility spikes over the next two months.

“Volatility may pick up during the next earnings season. But for now, it may come down a little,” he said.

Barrier or compromises

A market participant noticed that the lookback offered some downside protection, which is not always the case with those products.

“Sometimes you just can’t price any barrier. But with the rise in two-year rates, you’re now able to do it,” he said.

“You get multiple features into one note while in the past, when rates were lower, you could only get one or two of them.”

He commented on the two-month lookback period.

“It may not seem like a lot, but if you extend it, you’ll have to give up something else. The further you go out in your lookback timeframe, the more likely you can strike a very low entry point, which works to your benefit.

“From a pricing standpoint you have to pay for it. If they do extend it, you’d have to give up one of the existing features to compensate for that,” he said.

Lookbacks have never been very common. But he noticed a few recently.

“It’s a unique feature. It’s especially attractive for two types of investors – those who are not familiar with structured products and those who are skeptical about the near term. If they fear more volatility ahead, it’s a good way to get equity exposure as opposed to stay on the sidelines. That way you don’t have to time the market,” he said.

Signs of revival

This deal is the largest lookback offering of the decade, according to Prospect News. The second largest one priced in October 2020 for $36.19 million. It was brought to market by JPMorgan Chase Financial Co. LLC and distributed by Morgan Stanley, the same distributor as the HSBC deal.

The two-year JPMorgan notes are also linked to the S&P 500 index. The lookback period was 15 days. The payout was double the index gain up to a 17.7% cap with no downside protection.

So far this year, issuers have brought to market four lookbacks, including last week’s HSBC deal.

Citigroup Global Markets Holdings Inc. priced one for $1 million in January as well and another one for $3.03 million last week. Both are distributed by Morgan Stanley.

UBS last week priced on the behalf of Barclays Bank plc another issue for $2.65 million.

All those products came out as two-year notes tied to the S&P 500 index with variable lookback periods ranging from two to three months.

Since the beginning of 2020, 24 lookback offerings have been brought to market totaling $149 million.

JPMorgan Chase Financial has been the most visible issuer.

The fee on the HSBC offering is 2.5%.

The notes (Cusip: 40441B314) priced on Feb. 14 and settled on Friday.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.