HSBC to price 14%-17% notes tied to two commodity ETFs in reverse convertible-like structure

By Emma Trincal

New York, Jan. 7 - HSBC USA Inc. plans to price callable yield notes linked to two commodity exchange-traded funds in a deal that sources said has a "fairly unusual" structure.

HSBC plans to price 14% to 17% callable yield notes due Jan. 27, 2011 linked to the Market Vector Gold Miners trust and the Energy Select SPDR fund, according to an FWP filing with the Securities and Exchange Commission.

Interest is payable quarterly.

The payout at maturity will be par unless either exchange-traded fund closes below its knock-in price - 70% of its initial share price - during the life of the notes, in which case the payout will be par plus the return of the worst-performing ETF, subject to a maximum payout of par.

Short-term, callable

The notes are callable on any quarterly coupon payment date at par plus accrued interest.

"It's a fairly unusual structure. It's definitely a reverse convertible with the callable feature in addition to it," said Suzi Hampson, structured products analyst at Future Value Consultants in London. "The call is not typical with reverse convertibles."

Hampson said that the notes are structured as a reverse convertible product because investors earn the high coupon regardless of how the underlying basket performs. "They get par at maturity as long as the underlying does not decline by more than the 30% barrier level," she noted.

While the call provision exposes investors to an early redemption risk, Hampson said that the impact of the call is limited given the short duration of the notes.

"Even if the notes get called after three months, you still get a pretty high coupon. Investors would be better off without the call because the issuer will call it if the payout is at par. But the call would be much more of an issue in the case of, for instance, a 15-year note. With this very short-term product, it doesn't make a big difference. Investors still get a pretty good interest payment," she said.

Worst-performing ETF

Another interesting feature with this deal, she said, is that only one - the worst performer of the two underlying ETFs - needs to decline by 30% or more in order to trigger the knock-in event and put the investor's principal at risk.

The Market Vectors Gold Miners is listed on NYSE Arca under the symbol "GDX" and tracks the price and yield of the Amex Gold Miners index. It has gained 19% over the past year.

The Energy Select Sector SPDR is listed on NYSE Arca under the symbol "XLE" and tracks the return of companies that develop and produce crude oil and natural gas, provide drilling and other energy-related services.

"I guess it depends on your perspective on the two commodity sectors," said Steve Doucette, financial adviser at Proctor Financial in Wellesley, Mass. "I just can't see gold or energy dropping by 30% in just a year. But regardless of that, I think the structure is what makes it very interesting," he said.

High income play

"It's a way to get a decent coupon if you don't see one of those two commodity ETFs dropping by more than 30% in the next 12 months," he said. "Obviously it would be a concern. But it's an interesting play, not so much to pick up return but to pick up a high coupon. You have a partial downside protection. And worse case scenario, you still earn a pretty high coupon."

The notes will price Jan. 22 and settle Jan. 27.

HSBC Securities (USA) Inc. is the agent.

© 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.