HSBC's three-year buffered AMPS with 25%-30% cap on Russell 2000 aim to lure moderate bulls

By Emma Trincal

New York, Feb. 4 -HSBC USA Inc.'s 0% buffered Accelerated Market Participation Securities due Feb. 21, 2014 linked to the Russell 2000 index are designed for mildly bullish investors who seek to outperform the index in a scenario of moderate growth, said Suzi Hampson, structured products analyst at Future Value Consultants.

The payout at maturity will be par plus double any increase in the index, subject to a maximum return of 25% to 30% that will be set at pricing, according to an FWP filing with the Securities and Exchange Commission.

Investors will receive par if the index declines by 20% or less and will lose 1% for every 1% that it declines beyond 20%.

"This investment is for moderately bullish investors who seek to outperform the index if the underlying growth is modest," said Hampson.

"As an investor, you have to be bullish but not too bullish. You don't expect growth to exceed the cap. Otherwise, your best bet would be to make a direct investment in the index or the [exchange-traded fund]," she said.

"The maximum return for the period is 25% to 30%. That's a 7.7% to 9.1% return per annum with leverage. It's doable."

Versus the index

In a moderate growth scenario, holders of the notes have a chance to outperform the index, she said, given the leverage on the upside and the 20% protection. Hampson said that a 20% buffer was "generous" compared to most products that only offer a 10% buffer.

On the other hand, the equity investor has other advantages: he's entitled to dividends and he's not subject to the credit risk of HSBC, she noted.

"These two types of investments are similar since they're both based on growth," Hampson said. "But they remain different proposals."

Low risk

In terms of risk, the product received a low risk rating of 3.36 as measured by riskmap.

Riskmap is a Future Value Consultants rating that measures the risk associated with a product on a scale from zero to 10. Hampson attributed the low risk to the above-average size of the buffer.

The notes received a good return rating as well of 6.36.

Return rating is Future Value Consultants' indicator, on a scale of zero to 10, of the risk-adjusted return of the notes.

"The return rating is high. That's because if the index falls by less than 20%, you get 100% back. In addition, the most you can lose is 80% of your principal, not 100%," Hampson said.

Gains, losses

The probability tables, a chart displaying probabilities of returns across different return buckets, give an illustration of the high return score. Investors have an 18% chance of losing capital and an 82% probability of generating gains. Within the gains, investors have a 60% probability - the highest - of generating annual gains in the 5% to 10% bucket.

"To be in that 5% to 10% bucket, all you need is an annualized return of 2.5% to 5%. That's between 7.5% and 15% during the three-year period. It's really achievable. That's why you have such a high probability," said Hampson.

Combining cap and leverage gives investors greater chances of obtaining returns near the maximum, she said.

"One of the selling points of those capped leveraged notes is that you're capped but you have a higher chance of getting a higher return up to that cap," she said.

As long as an investor or an adviser is satisfied with not earning more than the cap, the product may be a great tool for someone seeking to meet a target growth rate for a portfolio, she said.

"You may not go above that rate, but you have more chances of hitting your target than someone investing directly in the fund," she said. "As long as you're happy not to get more than the target, this product is a good fit."

Other ratings

The notes score well on two other aspects: value and overall.

Based on a scale of zero to 10, the value rating represents the real value to the investor after deducting the costs the issuer charges in fees and commissions on an annualized basis. The product has an 8.82 value rating.

The overall rating, on a scale of zero to 10, is Future Value Consultants' opinion on the quality of a deal, taking into account costs, structure and risk/return profile.

The notes have received a 7.76 overall score, which is high compared to recently priced products as illustrated on the rating versus riskmap chart, Hampson said.

The notes (Cusip: 4042K1DN0) will price on Feb. 18 and settle on Feb. 24.

HSBC Securities (USA) Inc. is the agent.

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