HSBC's $123.38 million of notes tied to S&P 500 strongly bid due to agent, market conditions

By Emma Trincal

New York, Oct. 19 - HSBC USA Inc.'s $123.38 million issue of 0% buffered return enhanced notes due Oct. 31, 2012 linked to the S&P 500 index was a hit because of who sold it - J.P. Morgan Securities LLC was the agent - and also because of shifting market conditions rather than its structure, sources said.

This is the third largest deal linked to this equity benchmark this year.

The payout at maturity will be par plus double any gain in the index, subject to a maximum return of 17.7%, according to a 424B2 filing with the Securities and Exchange Commission.

Investors will receive par if the index declines by up to 10% and will lose 1.11111% for every 1% that the index declines beyond 10%.

Plain vanilla

"It looks like quite a standard product, not anything that we haven't seen before," said structured products analyst Suzi Hampson at Future Value Consultants.

"I don't know what really pushed it. It probably depends on the channel of distribution."

Client-driven

A distributor said that deals of that size almost always come from one client first, sometimes followed by others joining the fray.

"I can't answer why somebody would buy it," he said.

"I can assure you that they didn't structure that out of nothing. Nobody just put those terms together and said 'Let's sell $123 million of it.'

"They had some kind of indication before putting it together.

"I'm sure they had one client and they expanded around it. That's what happened."

It's not the terms

Since Sept. 7, 12 similar equity-linked notes tied to the S&P 500 with a two-times leverage factor have priced, according to data compiled by Prospect News.

Seventy five percent of those deals - or nine out of the 12 - offered a higher cap, ranging from 18.2% to 25.5%.

The three with the highest caps, ranging from 20.25% to 25.5%, had no downside leverage. Those deals, however, priced last month. The top two were less than $1.5 million in size.

The $123.38 million deal issued by HSBC last week was by far the largest one in this category for that period of time.

It was also the third largest S&P 500-linked offering for the year after Royal Bank of Canada's $155.50 million of 0% Accelerated Return Notes sold on July 28 by Barclays.

The second one was Barclays Bank plc's $136.73 million of 0% Accelerated Return Notes, sold on March 24 by Bank of America Merrill Lynch.

Sell, buy

"It's hard to say why this deal was big in size last week," a sellsider said. "The distribution power of JPMorgan is pretty big.

"JPMorgan does have a significant amount of large clients. It could be one big client for a $50 million ticket, I don't know. But for them, it's doable."

The market shift last week was also probably a factor, he noted.

The S&P 500 oscillated between ups and down from Monday to Thursday but then rallied on Friday when the deal priced.

"We've seen a lot of disparity in JPMorgan's volume," this sellsider said.

"When there is a certain market correction, people think it's the right time to enter the market.

"There's a macro element to that. Look, when you've got a couple of days of Bull Run, you'll see bigger flows in the orders because people want to jump in.

"The deal in itself is pretty standard. Clients come in and out of those structures offered regularly. I think the Friday rally must have been a factor."

Fees were 1%.

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