Advisers opt for higher cap, smaller buffer when comparing two HSBC leveraged notes on S&P

By Emma Trincal

New York, Dec. 22 – HSBC priced two comparable two-year leveraged capped buffered notes on the S&P 500 index. The main differences were the cap and buffer levels, giving advisers a chance to express their respective preferences.

As the stock market moved back to bear market trajectory ahead of the Christmas weekend, the need for protection took second place.

More protection

The first note was more defensive. The cap was lower.

HSBC USA Inc. priced $9.04 million of 0% capped buffer gears due Dec. 19, 2024 linked to the S&P 500 index, according to a 424B2 filing with the Securities and Exchange Commission.

The payout at maturity will be par of $10 plus double any index gain, up to a maximum return of par plus 26.15%. This represents a 12.3% annualized compounded return.

The issuer offered a 15% buffer on the downside.

More upside

The second deal presented a more bullish strategy with a higher cap and a smaller buffer.

HSBC USA priced $4.11 million of 0% buffered Accelerated Market Participation Securities due Dec. 16, 2024 linked to the S&P 500 index, according to a 424B2 filing with the SEC.

If the index return is positive, the payout at maturity will be par plus 200% of the index return, subject to a maximum payout of par plus 33.45%.

The cap is the equivalent of a 15.52% annualized compounded return.

The buffer size is 10%.

Bullish bet

“I’d lean toward the lesser buffer and the higher cap,” said Steve Doucette, financial adviser at Proctor Financial.

“With 200% leverage and a 33.45% cap, the market only has to be up about 8% a year and you max out. Unless we go into a deep, prolonged recession, I don’t think you really need that 15% buffer two years out.”

The 10% buffer was still a positive element in the structure. It guaranteed investors would outperform the underlier on the downside, which is always one of Doucette’s major goals when purchasing structured notes.

Entry point

His top concern was to avoid missing out on the next rally.

“The market moves so quickly; you could easily be capped out given that we’re already down 20% for the year.

“This is a market that can move 3% or 4% a day. Coming off of a bear market, we could easily be off to the races two years from now.”

The S&P 500 index has already jumped 9.5% from its mid-October low. In spite of this rally, a sell-off resumed last week after the Federal Open Market Committee met.

On Thursday, the S&P 500 was back in bear market territory closing at 3,822.39, or 20.7% off its Jan. 4 high.

“It’s been going up and down. But we’re still in a bear downturn. So that reduces the need of a big buffer,” he said.

But the timing was key.

“How quickly will the market go back up if there is a recession?

“A lot is going to depend on the magnitude of the recession if we have one. Obviously, the Fed is going to influence the outcome,” he said.

Two-year tenor

One caveat with both deals was their duration.

“I’d like to see what happens if I extend the term beyond two years and get rid of the cap. I don’t like the two-year. You don’t have any idea of where the market will be in this short timeframe. Three to five years would make me much more confident about the risk of going into a recession.

“If I can’t get rid of the cap that way, maybe I would consider something like 150% leverage on a three year.

“As we’re coming out of a bear market, my priority would be to eliminate the cap,” he said.

Timing

Matt Medeiros, president and chief executive of the Institute for Wealth Management, liked both deals. But his stance was also more bullish.

“These are pretty straightforward notes,” he said.

“Because of the market’s current levels, I would probably prefer the note with the smaller buffer and the higher upside potential.

“My view reflects the recent moves in the S&P. The index is already down 20% from its high this year.

“You get a good margin of safety. The deal is pricing at a good time.

“While I don’t read much into the short-term moves of the market, the outlook two years from now seems pretty good to me,” he said.

UBS Financial Services Inc. and HSBC USA Inc. are the agents for the $9.04 million offering.

The Cusip number for those notes is 40441B561.

The fee is 2%.

The agent for the $4.11 million issue (Cusip 40441XYL8) is HSBC Securities (USA) Inc.

The fee is 0%.

Both deals settled on Tuesday.

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