HSBC’s autocallables linked to Nasdaq Biotechnology ETF target more conservative yield-seekers

By Emma Trincal

New York, Dec. 2 – With its upcoming three-year autocallable yield notes linked to the iShares Nasdaq Biotechnology exchange-traded fund, HSBC USA Inc. is offering an income-oriented product with risk mitigation features but a modest yield in an attempt to appeal to more conservative investors, sources said.

The interest rate will be at least 5.5% per year and will be set at pricing. Interest will be payable semiannually, according to an FWP filed with the Securities and Exchange Commission.

The notes will be called at par if the fund closes at or above its initial level on any semiannual call observation date.

The payout at maturity will be par unless the fund finishes below its barrier level, 60% of its initial level, in which case investors will receive a number of the fund shares equal to the principal amount of notes divided by the initial price of the fund. Fractional amounts will be paid in cash.

Fixed, no worst of

“This is a classic reverse convertible with an autocall. These are structures that people like. The theme is clear: income,” a structurer said.

“The underlying is volatile but perhaps less so than many stocks used normally in these products. From the structure standpoint it is also a bit less risky than other reverse convertibles or phoenix types.

“First, the coupon is guaranteed. There’s no contingency. You know you’re going to get your coupon. ... You just don’t know for how long since it’s an autocall.

“Second, it’s not a worst of. It’s tied to one underlying only.

“Those two things, the fixed coupon and the single underlier, make this structure much more suitable to risk-averse investors. You also have 40% in contingent protection. The result of course is a relatively low coupon.”

This product counters the general trend, he added, as a large part of the market for equity-based income products now shows riskier yield-enhancement features.

“Fixed coupons have become less common,” he noted.

“We don’t see as many anymore. I think it’s because people really need income. They want to boost the coupon and are willing to take on more risk.

“This one is trying to strike a balance between yield and risk leaning toward less risk.”

Extra volatility

The underlying fund, however, can make wide price moves, showing a volatility level that can capture more premium compared to a broad benchmark, he noted.

The ETF is up 10% for the year but has dropped 8% over the past six months.

The iShares Nasdaq Biotechnology ETF has an implied volatility of 26% versus 12.5% for the S&P 500 index. Because reverse convertibles are short volatility instruments, the higher the premium received on selling the option, the higher the yield.

However, the fund is less volatile than certain stocks also used in equivalent instruments, with implied volatilities in the 40s or mid-30s, according to data compiled by Prospect News.

The top holdings in the fund are Amgen Inc., Regeneron Pharmaceuticals Inc., Gilead Sciences Inc., Biogen Inc. and Celgene Corp., according to iShares’ website as of Dec. 1.

“People are definitely hungry for yield, and getting an index-related autocall is very desirable,” a market participant said.

“It’s quite a low coupon, and it would work for investors who would be OK with that type of exposure.

“It’s not a broadly diversified index.

“At the same time, you need a 30-day implied volatility of at least 30% to get a decent or fair coupon.

“Indexes are usually in the low 20s. The vol on this one is a bit higher but not very much higher, so I’m not surprised to see a 5.5% in there.”

HSBC Securities (USA) Inc. is the agent.

The notes will price and settle in December.

The Cusip number is 40433UEU6.

© 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.