HSBC’s autocallables on Russell, S&P to help investors navigate uncertain, toppish market

By Emma Trincal

New York, April 4 – HSBC USA Inc.’s 0% autocallable barrier notes with step-up premium due April 10, 2028 linked to the least performing of the Russell 2000 index and the S&P 500 index provide enough of a return and downside protection to be used as equity replacement in a choppy and uncertain market, advisers said.

The notes will be called at par plus at least 12.65% per year if each index closes at or above its initial level on any annual valuation date. The exact call premium was to be set at pricing, according to an FWP filing with the Securities and Exchange Commission.

The payout at maturity will be par plus 50.6% if each index finishes at or above its initial level.

If the least performing index declines but finishes at or above its threshold level, 70% of its initial level, the payout will be par.

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

Snowball

“If the market continues to go up, you get called and collect the coupon. If it’s up only a little bit, you collect as well. It’s nice to have this kind of payout because there is a lot of uncertainty right now in the market,” said Steve Doucette, financial adviser at Proctor Financial.

“I like these snowballs. At first, I didn’t like them. But I changed my mind and we’ve done a few in the past couple of years,” he said.

Snowballs are autocallables providing payment upon the early redemption under the form of a cumulative call premium.

“It’s nice to be able to lock in a double-digit coupon. And I like that it’s a cumulative premium. If you miss a call you can catch up later.

Momentum action

Doucette said the market has been rallying so much, he is no longer feeling the “Fear of Missing Out,” or “FOMO,” at least not with this note.

“I’m not in a FOMO mode. The market keeps on making new highs. It’s more momentum-driven. Is it going to be higher, or down? We have no way to know where it’s going to turn in this environment. If the Fed cut rates, we could be right back at the races. But you can’t predict this market. So, it’s nice to lock in a return close to 13%.”

Double-digit return

“You have four chances of getting 12.65% a year. That’s not bad. Assuming the market is up only 10% a year during that time, you’re going to outperform. But it’s just a guess,” he said.

If the notes are called, Doucette said he could roll the money into another snowball, adjusting the protection level to the market conditions at that time.

“I like this note. The 70% barrier is solid for a four-year. I’m seeing the market going forward for a little bit. Maybe you’ll get called in a year or two. That would be a good outcome.

“But if you don’t, four years is enough time to recover from a bear market and avoid massive losses especially with a 70% barrier.

“It’s a neat note. I could use it as equity replacement.”

Premium benefits

Matt Medeiros, president and chief executive at the Institute for Wealth Management, also had a favorable opinion on the security.

“There’s a high probability that this note will be called prior to maturity if you look at the historical cycles of those two indexes,” he said.

The call premium was attractive for several reasons, he added.

“The rate of return itself is attractive. It’s also a stated premium as opposed to what you get with a leveraged note, which could be nothing if the market is flat. Here even if it’s flat, you get 12.65%. That’s more than a lot of return expectations over the next few years.”

Finally, the cumulative premium was a significant advantage.

“In theory you could miss three years and collect more than 50% at maturity. It’s very attractive compared to a regular income note.

On the downside, the 70% barrier was “sufficient” in his view.

“It’s enough on a four-year. But you probably won’t need it because the chances of being called before maturity are high.”

Core allocation

Medeiros also viewed the notes as an asset allocation tool.

“If you’re modestly bullish, you can use this note and put it in your equity core bucket,” he said.

“Let’s say that I have 20% in my core, I could put 10% to 15% in the note and use 5% to 10% as alpha generator.”

“By that I mean a long only equity position, which I can trade.

“The note can be used as a hedge. You can add it as a component of your active strategy.”

He offered an example.

“If I see signs of a slowdown in tech, I may modify my 20% allocation by keeping 10% in the note and reducing the other 10%.”

Reduced risks

Overall, the note was relatively conservative.

“The downside risk is mitigated because of the statistical probabilities of being called during the period,” he said.

In the unlikely scenario of a “no-call, “the 70% barrier over a four-year maturity was relatively safe, he added.

Dispersion risk due to the worst-of was not a significant concern.

“It doesn’t bother me. It’s the S&P and the Russell. You have enough correlation between the two, so your risk is reduced.

“And since the indexes can be flat or up point-to-point as long as none of them is negative, I don’t see a big risk. Not on a four-year.

HSBC Securities (USA) Inc. is the agent.

The notes were set to price on April 3 and to settle on April 8.

The Cusip number is 40447AR48.

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