HSBC’s $1.4 million autocallable snowball on S&P 500 offers buffer, likely short life

By Emma Trincal

New York, March 20 – HSBC USA Inc.’s $1.4 million of 0% autocallable buffered notes with step-up premium due March 16, 2026 linked to the S&P 500 index give investors three opportunities to receive a cumulative premium (“step-up”) as long as the index is not negative. The double-digit return also comes with a buffer at maturity, which provides added safety assuming the notes are not called before, an adviser said.

The notes will be called at par plus a 12.1% annualized call premium if the index closes at or above its initial level on any annual valuation date, according to a 424B2 filing with the Securities and Exchange Commission.

If the notes are not called, the payout will be par unless the index has finished below its 85% buffer level, in which case investors will lose 1% for each 1% decline of the index beyond 15%.

One-year

“We’re probably near the bottom in this market cycle. The odds that the S&P will be up this time next year are pretty high. So, it’s not really a three-year note. It’s a one-year play,” said Carl Kunhardt, wealth adviser at Quest Capital Management.

The snowball structure was favorable to investors, he added.

“One year, 12%. I’d do it. I just play the call. If I’m wrong, then I can get 24% the following year. On the third year, if I even get to the third year, my potential upside is 36%.

“To miss the payment three times, we would have to be down three years in a row, which has never happened,” he said.

12% cap

Kunhardt said he could use the notes for a small portion of his equity bucket, citing a 5% allocation.

“It’s tied to the S&P only, which makes it easier to allocate, and I’ll always have the S&P in my portfolio because it’s my core allocation,” he said.

Investors in the notes need to be comfortable with the call premium, as it also caps the upside.

“I’m happy with 12% since my long-term expectation for the S&P is 6% to 8%,” he said.

“Could the market be up more than 12%? Of course. You can get steep rebounds after a market dislocation. But I am an asset allocator. I’m going to go with my long-term return expectation. That’s my benchmark. I don’t make assumptions based on short-term moves.”

Protection

As a compensation for capping the upside, investors benefit from a 15% hard buffer, another attractive term.

“Assuming I hold the notes to maturity, I’m one-to-one on the downside, which is what I would be anyway if I was long the index. But then I get the 15% buffer. I’m better off than if I was long the index,” he said.

The call was another risk mitigating factor in the structure.

“The call drives my return. But it also eliminates the risk. Once I’m out at par, the risk is zero,” he said.

“While I’m holding the notes, I just go to the next call. Each time I get another chance to get called. All I’m doing is limiting my upside.

“You have to decide if you can live with 12%. I’m happy with 12%. As long as I’m not greedy, it’s a nice note.”

In-the-money

Jerry Verseput, president of Veripax Wealth Management, said he would slightly change the payout at maturity to increase the odds of winning for his clients.

“My preference would be to get less on the upside but with an in-the-money buffer at maturity,” he said.

“I would keep the same 85% buffer level but if the index is between 100 and 85, I would get the premium instead of par.”

In options language, the term “in-the-money for a long call position refers to the current price situated above the strike price. The current price is the initial level; the strike, the 85% buffer level.

Verseput said he would be willing to accept a 10% instead of a 12% premium in order to get the “in-the-money” pricing.

“That way, if the S&P is down 15%, I’m still getting the full premium. The market is down 15% and I get 30% at maturity,” he said.

He explained why he preferred this type of payout.

“I use those notes as stock replacement. I want to outperform on the downside. But if you hold this note three years without getting anything at the end, that’s not a very good result at all,” he said.

“I look for a step-down because I’m not trying to beat the market. I’m only trying to increase the chances of my clients’ success. The step-down vastly increases the chances of getting 10% a year.”

He used the term “step-down,” to describe this “in-the-money” feature in which the call threshold steps down from the initial price to the buffer threshold.

Digital notes often come with “in-the-money” features as well, he said. But the autocall was his favorite structure for this kind of payout.

“Digitals are bullet. You have to wait to be paid. With this autocall, if I get called, I can book the gain and compound it into the next note,” he said.

Another deal

He noted that HSBC brought to market another issue of autocalls for $1.67 million, which met his requirements – “step-down” feature and lower premium.

The terms were the same, including the maturity date, with the following exceptions:

• The cumulative annualized premium was 10.25%;

• The call threshold at maturity was 85% placed at equal level as the buffer; and

• The fee was 0.8% compared to 0% for the initial deal.

“This one has a step-down with a lower premium. That’s exactly what I’m talking about. You get a little less on the upside for this huge advantage of getting paid above the buffer,” he said.

Modest fee

The small fee of 0.8% was perhaps another factor contributing to the lower premium. But for Verseput, its impact was probably modest.

“The end terms depend on how much call options you buy. If you have to take some capital on the front end for the commission, it ends up having a multiplying effect on the final terms,” he said.

“In this case though, what cost the most is the step-down. The fee is not very high and probably didn’t have a big effect on reducing the premium.”

HSBC Securities (USA) Inc. is the agent for both deals, which priced on March 10 and settled on March 15.

The Cusip number for the $1.4 million deal is 40441XW48.

The Cusip number for the $1.67 million deal is 40441XY53.

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