HSBC prices one of summer’s top deals with $155.1 million Accelerated Return Notes tied to S&P

By Emma Trincal

New York, Sept. 2 – HSBC USA Inc. priced $155.1 million of 0% Accelerated Return Notes due Oct. 28, 2016 linked to the S&P 500 index, one of the largest deals of the summer.

If the index return is positive, the payout at maturity will be par of $10 plus 300% of the index return, subject to a maximum return of 12.27%. If the index return is negative, investors will be fully exposed to the decline, according to a 424B2 filing with the Securities and Exchange Commission.

BofA Merrill Lynch was the distributor.

Big summer issues

The same agent priced the two other largest deals this summer, which were also linked to the S&P 500.

The structure of those top deals was similar to the deal that priced last week: a 14-month tenor, a leverage multiple of three, a cap in the low double digits and full exposure to losses on the downside.

The top deal was Bank of America Corp.’s $168.52 million issue that priced at the end of July. The other one was Barclays Bank plc’s $156.13 million issue that came out a month earlier.

Buy low

The size of last week’s deal, which offered no protection in the midst of a roller-coaster week in the markets, did not surprise sources.

“The market is under pressure. Volatility is up. When volatility is up, these deals price better,” said a sellsider.

“For people ready to jump in, that makes total sense. You get a better entry and better terms.”

The bid on those short-term, three-times levered capped notes with potential for 100% losses depends a lot on investors’ view and appetite for risk.

“If the investor is ready to put some money into play, it’s a good time to issue those notes and a good time to buy them,” he said.

“There may be downside risk, but where are investors going to put their money? Unless you’re totally bearish, now is a good time from a valuation standpoint.

“Most investors don’t believe the market is going to collapse. I personally don’t expect a bear market in the short term. You have no structural problem in the U.S. There is no Lehman Brothers going under. China’s growth is weakening, but this is not a new story.

“So I think the odds for the S&P are still good.”

Recent volatility spikes enhance the terms of products because “most products are short volatility,” he said.

“Early on in the year I was worried about the opposite: volatility was too low, entry points were too high.

“Now pricing is getting much better, terms are more attractive.

“Objectively and technically, it’s a good time to be in the S&P right now.”

Term structure

A market participant said that the rise in volatility could be better used by shortening the term of the notes even if 14 months may appear short for most investors.

“It’s a bit long for me. The short-term end of volatility is high right now. I would want to profit from it,” he said.

“I’d rather do the structure on a three-month. Right now on the S&P, three months, three-times I could get 8%. I would actually look into a four-month where I could get a 9% cap. These are absolute levels.

“You get a higher cap when vol is higher, so I’d stay on the short end of the volatility curve.”

The notes (Cusip: 40434E630) priced on Aug. 27.

BofA Merrill Lynch was the underwriter.

The fee was 2%.

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