HSBC's two return enhanced notes tied to the S&P 500 index target two varieties of bulls

By Emma Trincal

Nov. 3 - A couple of leveraged, capped equity-linked notes are aimed at bullish investors showing different shades of bullishness from the aggressive to the more moderate type, sources said.

HSBC USA Inc. plans to price on Friday two issues of 0% return enhanced notes due Nov. 21, 2012 linked to the S&P 500 index, according to two separate FWPs with the Securities and Exchange Commission.

Both one-year notes feature the same participation rate on the upside.

For the first product, the payout at maturity will be par plus double any index gain, up to a maximum return of 22.8%. Investors will be exposed to any losses.

With the second product, investors at maturity receive par plus double any index gain, up to a maximum return of 14.8%.

In exchange for the lower cap, investors get a 10% buffer on the downside.

Once the index falls by more than 10% though, they will lose 1.11111% for each 1% decline.

As a result of the downside leverage factor in this second product, the prospectus warned that investors may lose up to 100% of their principal.

It's not equity

"I would take the one with the downside protection," a financial adviser said.

"Having a buffer is very important for us, especially on a one-year investment and in this volatile market. You get a 14.5% cap. Any double-digit cap is still good."

This financial adviser said that investors, when opting for one note versus the other, should decide whether they want their investment to be a traditional fixed-income or an equity play.

"If it's an equity play, you'd want the higher cap. But then why not invest in the S&P 500 directly? Why would you give yourself a cap?

"I'd rather think of it as an enhanced fixed-income product," the adviser added.

"You take a bit of protection on the downside. It's not as much protection as a fixed-income security, but at least you get a cap at 14%, which is still better than what you would get with a fixed-income product.

"Anytime you invest in equities, you want to see some downside protection, otherwise I don't see the trade-off," this financial adviser went on.

Others took the opposite view and said that they would rather invest in the notes featuring the much higher cap despite the lack of downside protection.

Super bull

"If you ask me which one I would pick if I had to choose one among the two, I'd take the one with the higher cap," said Jim Delaney, portfolio manager at Market Strategies Management.

"If I've got to be bullish, I want to be bullish."

He looked at a chart of the S&P 500 this year, pointing to the high at 1,363 in April 29, followed by the lowest point in Sept. 30 at 1,131.

"In those five months, the market dropped by 17%," he said.

On Oct. 27, the market rallied sharply after the European debt deal, he said, reaching its most recent high at 1,284.

"And since the low in September, the benchmark has gained 13.5% in less than a month," he said.

"Now let me tell you why I'm bullish. When you look at this week, you had MF Global going under; the announcement of a referendum in Greece; the political crisis in Greece. If you look at all what happened and how the market reacts, it seems to me that the market priced in a lot of bad news.

"Two months ago, those types of headlines would have put us down 500 points," he said.

"At this point, there's almost a fatigue around it, so If I had to choose, I would take the one with the higher cap and no buffer.

"You already have a pretty good valuation: The S&P 500 hasn't even reached a new peak from back in the spring, that's one. Second, the U.S. economy is exhibiting more strength than weakness," he added.

"Third, the market has already priced a lot of negative stuff.

"And finally, for that 10% downside protection, you're giving up a lot of upside.

"There's a big gap between 14% and 22%," he said.

Both notes will price on Friday and settle on Wednesday.

The Cusip for the notes with a 22.8% cap is 4042K1RS4.

The Cusip for those with the 14/8% cap is 4042K1RR6.

For each deal, HSBC Securities (USA) Inc. is the underwriter, and J.P. Morgan Securities LL, the placement 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.