HSBC’s $16.13 million 8% autocallable yield notes on Nasdaq offer straightforward income play

By Emma Trincal

New York, May 22 – HSBC USA Inc.’s $16,128,000 of 8% autocallable yield notes due Nov. 22, 2024 linked to the performance of the Nasdaq-100 index mitigate downside risk with the combination of a buffer and guaranteed income, which helps clients avoid “surprises,” a financial adviser said.

Interest is payable semiannually, according to a 424B2 filing with the Securities and Exchange Commission.

The notes will be called at par if the index closes at or above its initial level on any semiannual call date.

The payout at maturity will be par unless the index finishes below its 75% buffer level, in which case investors will lose 1.3333% for every 1% decline of the index below 25%.

Margin of safety

“This is the type of note that seems to be solving a problem. It also has the best chance of not being a surprise,” said Jerry Verseput, president of Veripax Wealth Management.

He said the structure offered a healthy margin of safety.

“If you add the 25% buffer and the interests over 18 months, you get a 37% level of protection.

“I would say it's very safe,” he said.

Investors will collect the 8% annualized coupon. But they are exposed to reinvestment risk.

“After six months, you may be called. But you’re still getting your full annualized return.”

For income-seeking investors, the 8% annualized return appeared reasonable, he said.

It’s the economy

“You need a real return if you want to accomplish your financial goals. This one is reasonable,” he said.

A note should also limit the odds of unforeseen outcomes.

“This one should help you avoid surprises, which is something very important for investors. If you lost money on this note, it would be all over the news,” he said.

“The Nasdaq represents the economy. It used to be a niche index. Now its biggest components are the biggest drivers of the economy.

“The Microsoft, Apple and Amazon are really the engine of growth in the U.S.,” he said.

The top seven holdings in decreasing order – Microsoft Corp., Apple Inc., Amazon.com Inc., Nvidia Corp., Alphabet Inc., Meta Platforms Inc. and Tesla, Inc. – represent 53.5% of the Nasdaq-100 index.

Fair return

The S&P 500 index also shares some of the same mega-cap components, he noted.

“But it’s not as good a representation of the U.S. economy as the Nasdaq,” he said.

The same seven holdings constituting 53.5% of the Nasdaq make for 28% of the S&P 500 index.

“If the Nasdaq is not doing well, neither is the economy, which is why you're unlikely to run into surprises with that particular security,” he said.

“You get your 8% regardless. If 8% is not enough for you, you're in trouble.”

For Verseput, the 8% return was fair in relation to the level of downside protection offered.

Single underlier

“Our focus right now for each investment we buy is to try to solve a problem. Ultimately, for the client, there are two main problems to solve: getting a reasonable return and avoiding surprises,” he said.

“I believe that an 8% fixed coupon is reasonable,” he said.

The 25% buffer plus the 12% income stream reduced “surprises” by strengthening the downside protection, he noted. Another risk mitigation factor was the exposure to a single underlier.

“It’s not a worst-of and it’s not a worst-of based on completely uncorrelated assets, almost picked at random. I’ve seen things like gold miners, Tesla and Brazil in a worst-of...having that type of exposure will bring many surprises.”

One term that may have been improved was the tenor.

“I would rather have something a little longer than 18 months, but other than that, I think it’s an interesting note.,” he said.

Moderate bears

Win Thin, head of global strategy at Brown Brothers Harriman & Co., agreed that the economy was the main variable driving the potential risk associated with the notes.

“If you’re a bear, it’s a good note. You can earn 8% a year guaranteed. But it’s not for the super bear. The super bear will probably bet on more than a 25% decline for the 18-month period,” said Thin.

“If the Nasdaq is down less than 25%, you’re fine because of the buffer. But if it goes down more than that, you start to lose some of your principal. Actually, you start to really lose money at a deeper level since the income can cushion some of your losses.”

Assessing the breakeven at a 37% decline when accounting for the buffer amount and coupon payments, Thin saw limited downside risk even in a bearish scenario.

“It seems unlikely to me that the Nasdaq would be down 37% during that timeframe. A 25% decline, yes. That’s possible.

“You would have to be moderately bearish, not extremely bearish,” Thin said.

Recession

For Thin, the main risk factor weighing on the market is an economic recession.

“I don’t think there is a high risk of seeing the Fed hiking rates. Fed easing expectations are now running high,” he said.

“I’m not too concerned about geopolitical risks either.

“What’s more at play is the economy. The recession is happening. We just don’t know how deep it is and how long it’s going to last.”

HSBC Securities (USA) Inc. is the agent.

The notes settled on Monday.

The Cusip number is: 40447ABD5.

The fee is 0.05%.

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