HSBC’s snowball with digital on S&P offers lower premium at maturity for uncapped return

By Emma Trincal

New York, June 28 – HSBC USA Inc.’s 0% autocallable barrier notes with step-up premium and digital upside return due June 30, 2028 linked to the S&P 500 index provide cumulative call return for four years. But the premium converts into a lower digital payout at maturity to allow for uncapped upside. The feature was a tradeoff advisers found unattractive.

If the index closes at or above its initial level on any annual valuation date, the notes will be called at par plus an annualized call premium of 9%, according to an FWP filing with the Securities and Exchange Commission.

If the index finishes above 25% of its initial level, the payout will be par plus the index return.

If the index finishes above its initial level but less than or equal to 25%, the return will be a digital payout of par plus 25%.

If the index finishes negative, the payout at maturity will be par unless the index has finished below its 75% barrier level, in which case investors will lose 1% for each 1% decline of the index from its initial level.

Small digital

“I don’t think I would do that one,” said Kenn Nuttall, chief investment officer of BlackDiamond Wealth Management.

“Usually, you can cumulate the premium each year, including at the end. That’s why they call it a snowball,” he said.

With this note, the 25% digital payout after five years was lower than the 27% premium an investor would receive if called at the end of the third year, he noted.

“The 25% digital doesn’t add up to five times the premium. It’s not 45%. Twenty-five percent is just 5% a year, which is probably equal to the five-year bond on HSBC,” he said.

Likely call

Perhaps the digital size was a moot point since the notes were unlikely to be held until maturity, he said.

“You’re most likely going to get called. If the notes mature, it means that you have gone through four years of negative returns. There is a slim chance that this would happen.”

Because of the high probability of a call, the focus should be on the call premium, he noted.

“I look at the 9% number and I think it’s low.

“After the regional banking crisis back in March, clients were able to get much higher coupons. Even last month, you could get better pricing,” he said.

Tenor

Matthew Chancey, financial planner at Coastal One, was not impressed by the payout and term.

“The structure is too complex, and five years is a long time,” he said.

“If you go out five years, you should get 100% upside or more. I would want a shorter duration.”

His expectation for higher returns was based on growth notes bought at the right time with enough leverage.

“Those products are very entry point-sensitive. Obviously, any time you buy low and sell high, your chances of making money increase.”

For autocalls, the timing may not be ideal as volatility is at its lowest point since February 2020, just before the pandemic crash. The low volatility environment dampens coupon sizes, he said.

Overall, though, his main criticism was the long maturity.

“HSBC is a solid counterparty. But I’m not keen on the term.

“I want to lock in my profit much quicker than that,” he said.

Risk return

Matt Medeiros, president and chief executive of the Institute for Wealth Management, said he found the terms overly complicated.

“This note doesn’t make a lot of sense to me. I like the cumulative coupon component. But to be short-changed at maturity with a lower coupon is unattractive. I don’t like to take equity risk without equity upside,” he said.

While the 25% digital payout did not cap the upside, getting only the index gain above the 25% threshold did not do much for noteholders, he noted.

Medeiros also pointed to the downside risk.

“I have seen notes lately with much better downside protection and over shorter timeframes. A 25% barrier on a five-year doesn’t seem like a lot to me,” he said.

Perhaps the biggest drawback was the uncertainty around the final return outcome.

“With this payout, my return expectations at maturity are vague, which doesn’t help me from a risk management perspective.

“It’s OK to get unexpected returns on equity but you want to know your risk. This seems a little bit too ambiguous to me,” he said.

HSBC Securities (USA) Inc. is the agent.

The notes were expected to price on June 27 and to settle on June 30.

The Cusip number is 40447ADH4.

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