HSBC’s $1.12 million participation notes with autocall on indexes to offer premium or growth

By Emma Trincal

New York, March 1 – HSBC USA Inc.’s $1.12 million of 0% barrier participation notes with autocall feature due March 2, 2026 linked to the least performing of the S&P 500 index and the Russell 2000 index give investors a potential double-digit return if called or, alternatively, a chance to outperform the market at maturity.

Faced with two possible outcomes, advisers need to assess what scenario would work best for them based on their return expectations.

The notes will be called at par plus 11.15% if the worst performing index closes at or above its initial level on Feb. 26, 2025, according to a 424B2 filing with the Securities and Exchange Commission.

If the notes are not called and the worst performing index finishes above its initial level, the payout at maturity will be par plus 1.5 times the return of the worst performing index.

If the worst performing index finishes negative but at or above its 70% barrier level, the payout will be par. Otherwise, investors will be fully exposed to the decline of the worst performing index.

Two setups

Steve Doucette, financial adviser at Proctor Financial, said the structure could be broken down in two scenarios. The first one is the one-time autocall after one year with a premium capping the upside. Should the call be missed, the second setup transforms the note into a pure growth play with leverage and unlimited upside.

Structurers and buysiders alike have coined the term “catapult” to designate this type of product.

Worst-of exposure

While the worst-of is linked to two U.S. benchmarks, the S&P 500 index and the Russell 2000 have not moved up at the same pace, Doucette noted.

“The S&P has done pretty well. The Russell is coming back a bit. You can’t really predict which one is going to underperform,” he said.

Investors would be exposed to the underperforming index.

At first glance, Doucette said that he preferred the final growth scenario with the uncapped leveraged payout.

Growth scenario

“You’re betting that the market will be down 12 months from now, that way you don’t get called and you can get the leverage with no cap a year later,” he said.

“But you have to be confident that the market will recover in the second year. If the worst one is down on year one, it really needs to recover fast; otherwise, you get nothing.”

The need for a speedy rebound will depend on the extent of the market decline on the first year.

“If my return at maturity is 2%, I don’t really care about getting 3%. The leverage and the no-cap aren’t going to help,” he said.

Market timing

For the notes to pay off, the market would have to be flat or modestly higher on the first year. Alternatively, it would have to be negative on the first year and strongly bullish on the second one.

“There’s a lot of market timing involved here. It makes it hard to be comfortable with that note,” he said.

The growth scenario at maturity may be the most uncertain of the two.

“Catching that 11% return if the market doesn’t go anywhere might actually work,” he said.

“Perhaps that’s the best thing. The market is flat, and you collect your 11% in one year.”

Worthy premium

Another financial adviser agreed.

“I like that note,” he said.

“You want to be called away in one year and pocket that 11% return.

“If you don’t get it, that’s because the market has been down. From that point on, all bets are off.

“We’ve been up so much I don’t see the market rising 20% from here. If the notes mature, you may get close to nothing.

“But if we’re flat, you can lock in that 11%.

“Getting 11% in one year is not such a horrible thing.”

Meeting expectations

Matt Medeiros, president and chief executive of the Institute for Wealth Management, said that the two possible results were both appealing.

“When I look at a structured note, I want exposure to an index, and I want my exposure to have some level of protection. Then I decide if I want growth or income and that will determine what kind of allocation I make,” he said.

He said he liked the notes because the call premium was in line with his return expectations regarding both indexes.

“If after a year I get called and receive 11%, I would be satisfied,” he said.

But the payout at maturity was also a positive scenario.

“If I didn’t get called and had the advantage of leverage with no cap, that would also be attractive.

“One of the most important things is to have the peace of mind of the protection at maturity. A 70% barrier on a two-year tenor is reasonable in my opinion.

“It’s an attractive note,” he said.

HSBC Securities (USA) Inc. is the agent.

The notes settled on Thursday.

The Cusip number is 40447AYJ7.

The fee is 2.25%.

© 2015 Prospect News.
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