HSBC’s autocalls on Intel offer conservative bet on unpopular name, but tenor is too short

By Emma Trincal

New York, Feb. 17 – HSBC USA Inc.’s $2 million of autocallable contingent income barrier notes with memory coupon due Feb. 13, 2025 linked to the performance of Intel Corp.’s shares provide value with the choice of an underlying stock that has been punished by speculators and momentum traders, said a contrarian portfolio manager.

One issue however is the short tenor, which puts investors at risk of being caught in the worst phase of the bear market.

The notes will pay a contingent quarterly coupon at an annualized rate of 13.5% if the stock closes at or above the coupon trigger level, 60% of the initial share price, on the relevant observation date, according to a 424B2 filing with the Securities and Exchange Commission.

Previously unpaid coupons, if any, will be automatically included whenever a contingent coupon is paid.

The notes will be called at par plus the contingent coupon if the stock closes at or above the initial share price on any quarterly observation date after six months.

The payout at maturity will be par plus all unpaid coupons unless the stock finishes below its 60% barrier price, in which case investors will receive a number of shares equal to $1,000 divided by the initial price or, at the issuer’s option, the cash equivalent.

Better value

“Intel is a very unpopular stock. Their growth is not as impressive as some of their competitors like Advanced Micro Devices. But by the same token, the stock is not overpriced the way most semiconductor companies are. It’s more of a value play,” said Steven Jon Kaplan, founder and portfolio manager of True Contrarian Investments.

Intel’s price-per-earnings ratio is 14.5 versus 90.5 for Advanced Micro Devices and 93.6 for Nvidia Corp., another big competitor.

Intel’s share price dropped 47% from its peak in May. Part of the decline was due to the high expectations of investors betting on the semiconductor industry, he explained.

“Typically, people buying semiconductor stocks seek high growth, high P/Es, high excitement. Those are the guys driving 90 miles an hour on the highway,” he said.

“Intel is not Nvidia or [Advanced Micro Devices]. It’s been growing much slower than the others.”

To be sure, Intel’s share price has been lagging that of its competitors. Nivdia and Advanced Micro Devices are up 21.2% and 46.35%, respectively for the year to date while Intel has posted a meager 4.46% gain.

Earnings miss

One recent hurdle for the company was its fourth-quarter earnings announcement on Jan. 26. Both revenues and earnings were well below Wall Street’s expectations. What’s worse, guidance for the current quarter projected a strong revenue decline. The stock in reaction dropped more than 10% in pre-market trading the following day.

After gapping down, the stock briefly rallied for a few days before slowly moving back down to its post-earnings level.

“There are plenty of negative headlines. Anyone who wanted to sell certainly was encouraged to sell,” he said.

Close to the cliff

For Kaplan, too many investors are chasing returns in crowded trades. Stocks that are not “high-fliers” tend to be avoided or sold.

“People have become reckless. In part it’s because we haven’t had a real bear market since March 2009. Investors have taken dangerous risks and they’ve generally been rewarded rather than punished, making them more eager to keep doing more dangerous behavior.

“They keep driving close to the cliff,” he said.

Intel does not meet the expectations of speculators.

“It’s just a slow-growth company, a more conservative play...It’s certainly not a pick for life-in-the-fast-lane investors,” he said.

But for the underlying of an autocallable income note, Intel was a “reasonable” choice, he said.

Being less overvalued and less popular, the stock added some value and safety to the trade.

“Intel works in this case because this kind of note is geared toward more conservative investors,” he said.

Too short

The structure however had its “pros” and “cons.”

On the plus side, the memory feature and the ability to get paid within a 40% negative range were attractive.

“That’s a better match for a bear market than a leveraged note for instance,” he said.

But some aspects of the structure were problematic.

For one, the tenor was not long enough.

“Two years is going to be a tough road. In two years, we may be close to a bottom. If there is any risk, it’s going to be magnified by the timeframe.”

An extended maturity would lower the risk.

“A four- or five-year note would give the market more time to recover,” he said.

A longer term would also enhance the memory feature.

“In general, I like the idea of having the memory for any structured note. If there is a pullback followed by a recovery, you can get a greater total return. But you do need a longer timeframe for that.”

Barrier, coupon

Kaplan would also reinforce the downside protection.

“40% seems conservative but a 40% decline can happen in two years. It has to be better than that. I always prefer buffers but if it has to be a barrier, 50% would be more appropriate,” he said.

Kaplan would hesitate to reduce the coupon rate in order to strengthen the downside protection.

“Perhaps a smaller coupon may help. But it’s hard to say. You want the coupon to be big enough to make the trade worthwhile. It’s a little bit tricky,” he said.

The portfolio manager would be all the more hesitant to cut the coupon given that noteholders are already “missing” the 5.18% dividend yield paid to shareholders.

“If I had to redesign the notes I would just go for a longer tenor. It would maximize the chance of earning the maximum return while reducing the odds of losing money at maturity.”

“Overall, I like the structure. But I don’t like the tenor,” he said.

HSBC Securities (USA) Inc. is the agent.

The notes settled on Feb. 15.

The Cusip number is 40428HVA7.

The fee is 1.75%.

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