Advisers debate cap in HSBC’s $649,000 barrier notes with call feature on Nasdaq

By Emma Trincal

New York, April 27 – HSBC USA Inc.’s $649,000 of 0% barrier participation notes with call feature due April 27, 2026 linked to the performance of the Nasdaq-100 index present two possible sources of return, one capping the upside, the other not. Advisers reflected over the respective value of a fixed call premium after one year or unlimited returns with risk at maturity.

The notes will be called automatically at par plus a call premium of 16.25% if the index closes at or above its initial level on April 24, 2024, according to a 424B2 filing with the Securities and Exchange Commission.

If the index finishes at or above its initial level, the payout at maturity will be par plus 1.5 times the index return.

If the index declines but finishes at or above its 75% barrier level, the payout will be par.

Otherwise, investors will be fully exposed to the decline of the index from its initial level.

Recession factor

Steve Doucette, financial adviser at Proctor Financial, had a bullish outlook making him uneasy about a structure whose call feature is de facto a cap on the upside.

“Sounds pretty interesting. But keep in mind that the Nasdaq is already up 16% this year. Just today, it’s up 2.5%. You never know if we’re going to have another run or not,” he said.

Doucette compared the call scenario with the participation at maturity. The timing of a potential recession was a key factor in determining which of the two scenarios would offer the best outcome.

“I like the note but mostly for the potential unlimited upside,” he said.

“I still like the 16% call return. But that’s a 16% set on a specific market timing.

“Everything pretty much depends on whether we get a recession or not.

“Everybody is saying that a recession is looming. If that’s true, you won’t get called and you’re stuck for three years.”

For a bull, getting “stuck” for three years with unlimited leveraged upside was not a negative. Doucette’s biggest concern was a potential call a year from now.

The intensity of the current rally raised concerns about the 16% cap, he noted.

FOMO

“The market is up a lot right now. The market always decides to take its own course,” he said.

“I sort of like the 16% potential return in one year because of the uncertainty. But if one year from now, the Nasdaq is up 30% and you get called, you miss 14%.

“The only issue I have with this note is: am I going to miss anything?

“We all suffer from FOMO, the fear of missing out. We know how quickly the market can rally.”

He looked at the chart for the past two years. The Nasdaq-100 index is now trading at around 13,000. It peaked at nearly 17,000 in November 2021.

“If we go back to those highs, that would be a 31% jump, twice as much as the 16% premium,” he said.

The premium is a fixed payout. But since it may or may not be earned, Doucette would not allocate the notes to his fixed-income portfolio.

“It’s pure equity. If I invest in equities, do I want to lock myself in for one year at 16%?”

The possibility of capping his potential gains with the call premium was too big a drawback for this adviser.

“We don’t know where the market is heading. But for my equity exposure, I don’t want to put money that’s going to be limited. I would rather have a small buffer or a barrier with unlimited upside and avoid the cap even if it looks like a great cap.”

Two valuable scenarios

Matt Medeiros, president and chief executive at the Institute for Wealth Management, said that he did not consider the call premium as a limitation.

“In this market environment, I’m not allowing myself to be greedy. I definitely think that the 16% cap after one year is attractive. I wouldn’t be opposed to that,” he said.

He admitted that in this year’s first four months, the index is already up 16%.

“But the market is not stagnant. If you buy the note today, there’s still another year. A lot of things can happen in a year as we’re facing a number of headwinds. To know that you can get this type of return even if the index is flat is really a positive,” he said.

The upside payout at maturity was also a good outcome.

“It’s nice to have the leverage and no cap over a three-year period,” he said.

“I don’t consider myself particularly bullish. So, I like the terms of this note.

“You either get the 16% guaranteed or the enhanced return. In each case, as long as the index is not down, you get paid.”

Downside protection

While he did not downplay the risks on the downside, Medeiros was relatively confident about the protection.

“There’s definitely a chance that the market may pull back and potentially quite substantially during the period,” he said.

“That’s if you don’t get called. But from a risk standpoint, you have to consider the risk at maturity. I’m not too concerned since I have a 75% barrier over a three-year period.

Investors, when assessing the value of a structured note, should compare it to a direct investment in equity.

“The call premium is limiting your upside. It’s a cap. But I don’t consider 16% as a limitation. Besides, without this cap, you wouldn’t get the terms that you get at maturity,” he said.

The call feature was part of a tradeoff allowing the issuer to price the barrier protection, the leverage and the “no cap” at maturity.

“We’re living with uncertainty. Downside protection and defined outcomes are welcome features. Investing in structured notes is timely in this environment as opposed to going long,” he said.

HSBC Securities (USA) Inc. is the agent.

The notes settled on Wednesday.

The Cusip number is 40441X4E7.

The fee is 0%.

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