HSBC’s 10% autocall on pharma stocks: not a buy-and-hold, low-risk strategy, advisers say

By Emma Trincal

New York, July 2 – HSBC USA Inc.’s 10% autocallable yield notes due July 11, 2019 linked to the least performing of three pharmaceutical equities, the common stocks of AbbVie Inc., Merck & Co., Inc. and Pfizer Inc., offer a very attractive yield. But registered advisers showed reluctance to consider a note likely to be shorter than its stated maturity and involving at least one risky underlier.

The notes will pay a quarterly coupon at an annual rate of at least 10%. The exact coupon will be set at pricing, according to a 424B2 filing with the Securities and Exchange Commission.

The notes will be called at par if each stock closes at or above its initial price on any quarterly observation date.

The payout at maturity will be par unless any stock finishes below its trigger level, 75% of the initial price, in which case investors will receive a number of shares of the worst performing stock equal to $1,000 divided by that stock’s initial price or, at the issuer’s option, the cash value of those shares.

Picking the worst

For Carl Kunhardt, wealth adviser at Quest Capital Management, the underlying bet associated with the notes was too tied to the riskiest of the three underlying stocks.

“Forget about Merck; forget about Pfizer...You’re really making a bet on AbbVie,” he said.

AbbVie is a research-based biotechnology company targeting specific, difficult-to-cure diseases.

“AbbVie has been dropped from coverage from Raymond James,” he said.

“Credit Suisse just downgraded them to underperform.”

The Credit Suisse report pointed to AbbeVie’s heavy reliance on its flagship drug Humira for sales.

“It looks like there are some legal issues as well...”

Heavy penalty

On Friday, a Federal Court issued a $448 million judgment against AbbVie for allegedly overcharging consumers, according to the Federal Trade Commission. The FTC filed a lawsuit against AbbVie and one of its partners in 2014 accusing AbbVie of attempting to “maintain a monopoly.”

The court order is the largest monetary award ever in a litigated FTC antitrust case, according to FTC chairman Joe Simmons in an FTC press release.

The share price has lost more than 2% since Friday. The price is down 6.8% year to date.

However, some equity research firms, such as Morningstar, like the company’s cash flow and its solid portfolio of drugs, stating that it puts AbbVie ahead of its competitors for the development of new drugs, such as cancer drugs. Others, such as Ford Equity Research, stress the value of the stock at that price.

Rolling the dice

Kunhardt offered another objection: buying the notes was more of a trade than an investment.

“It’s just a one-year play. Do I think a year from now AbbVie could be improving? Given what I’m reading and the research coverage around the name, probably not,” he said.

The notes made for an “attractive short-term bet,” he noted, pointing to the 75% barrier and the 10% annualized coupon.

“But it’s not something that would complement my asset allocation.

“When you look at equity, you look at long-term only.”

The payout made him even more cautious.

“You’re going worst-of. You’re betting on this one and everybody downgraded it.

“Why would I roll the dice?” he said.

Fairly good terms

Michael Kalscheur, financial adviser at Castle Wealth Advisors, looked at the big picture, knowing that most autocallable deals get called on the first observation date. He concluded that the notes did not fit into his business model.

“It’s a good return for that timeframe. HSBC is a very good credit, very low risk. I wouldn’t have a problem buying a note from them. But this deal is not what we do,” he said.

Autocall

His main concern was the high probabilities of a call on the first call date, which would shorten the duration from one year to three months.

“The chances of actually getting to maturity with the full coupon, the odds of this actually playing out are a needle in a haystack,” he said.

“You’re just going to get called out at the end of the first quarter. From a probability standpoint, that’s the most likely scenario.

“That gives you 2.5%. It’s pretty good. That’s a 10% annualized figure. You get your money back, you can move on to something else.

“I’m not arguing with the terms of the deal. But it’s a lot of hassle from a business perspective.”

Different line of business

Assessing the merits of the notes would require analyzing the three stocks, finding out which among the three is the most likely to be the lesser-performing one.

“All of that research to be done for just three months? How much time do people have to do this?

“That’s not the kind of shop we are. We just don’t have the resources for that.

“I’m not saying this is a bad deal. It’s just not what we do,” he said.

Kalscheur stressed how different his business model was.

“Some people are skilled at trading. We just don’t have the time or the inclination.”

Instead, his business model is influenced by Warren Buffet’s style of long-term investing.

“I buy a very good company at a very good price. I’m going to hold it for years, hopefully a decade.

“That’s how we feel we add value.

“This deal is just too narrow, too focused, too short-term.

“I would pass on that,” he said.

HSBC Securities (USA) Inc. is the agent.

The notes will price on July 6 and settle on July 11.

The Cusip number is 40435FP27.

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