HSBC’s $1.57 million trigger PLUS tied to Facebook show rare dual directional bet on one stock

By Emma Trincal

New York, June 5 – HSBC USA Inc. priced $1.57 million of 0% trigger dual directional Performance Leveraged Upside Securities due June 3, 2020 linked to the common shares of Facebook, Inc., according to a 424B2 filing with the Securities and Exchange Commission.

If the stock return is positive, the payout at maturity will be par of $10 plus 150% of the stock return, capped at 28.9%. If the stock declines by 20% or less, investors will receive par plus the absolute value of the stock return. Investors will be fully exposed to the stock’s decline from its initial share price if it falls by more than 20%.

Rare

“It’s a very unusual structure. You’re offering a growth note on an individual name. That in itself is not very common. But the absolute return on a single-stock is also unusual,” a market participant said.

“I suppose it’s a one-off given the size.”

An investor presumably could have bought the notes to express a range bound view on the stock or alternatively as a hedge.

Hedge or bet

“Maybe it’s for someone who already has the exposure to Facebook and wants to hedge it.

“But I doubt it. I often tell my clients to use options when they need to hedge a position. A listed option is probably less customizable but it’s cheaper,” the market participant said.

The product was likely designed for investors who believe the upside for the stock appreciation is limited after recent new record highs.

At the end of March, the price dropped almost 15% from the start of the year amid the Cambridge Analytica scandal. But it has regained full strength since, up 28% to hit an all-time high on Friday.

“I imagine this is for someone who sees the stock moving up and down but still wants to participate in it with the downside protection and the absolute return,” the source said.

Sideways

Donald McCoy, financial adviser at Planners Financial Services, said the notes could appeal to a number of cautiously bullish investors.

“It’s a range trade,” he said.

“You’re giving up the potential upside although you can still capture double-digit returns.

“You see volatility along the way. But you do think we’re near the peak and that returns going forward are going to be soft.”

Investors will “win” if the share price trades between -20% and +20%.

“You’re betting on the middle.

“I can see why people would want this. It gives you participation in the upside if you’re not counting on a strong growth.”

If the stock drops more than 20% investors will lose money, he noted.

“But if you owned the stock you’d suffer that loss too.

“The only way you would lose is if the stock was taking off a lot, for instance up 50%. But you’d still be up.

“I can see people being in the middle and finding it attractive.

“If you were ultraconservative or ultra-bullish you wouldn’t do it. This is a decent middle ground,” he said.

Risk

Tom Balcom, founder of 1650 Wealth Management, looked at the risk-adjusted return of the product.

He pointed to the cap, which is the equivalent of a 13.5% annualized compounded return.

“That’s nice. But this is on a big mover, technology stock... You wouldn’t see these terms on an index.”

“In fact, 13.5% is pretty low for a stock that volatile,” he said.

Balcom said the risk associated with the notes would not be suitable to his clients, who tend to be more conservative.

Part of the risk was due to the high valuation and volatility of Facebook.

“It’s not a low-price stock. They miss their earnings and the stock is down 25%.

“If the barrier is breached, if it doesn’t work out, how do you explain that to your client?

“It’s a lot of risk to take on one stock,” he said.

HSBC Securities (USA) Inc. is the agent. Distribution is through Morgan Stanley Wealth Management.

The notes (Cusip: 40435M284) priced on May 31.

The fee is 2.5%.

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