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Autocallable Contingent Income Barrier Notes and How to Recover Losses

Mar 30, 2023 Articles

Autocallable Contingent Income Barrier Notes are structured financial products that do not trade on any public exchange, which puts them in a riskier category of investments. These types of investments can be very speculative and are generally not suitable for investors seeking a moderate or conservative degree of risk. Despite the risks, brokers or financial advisers frequently recommend these investments to moderate or conservative investors because they offer higher yields.

Autocallable Contingent Income Barrier Notes Fast Facts

  • These notes pay out a coupon, which is a periodic payment made to the bondholders. Noteholders receive these payments until the note reaches maturity.
  • They may have also advertised that these structured notes limited downside risks. The idea of a “limited downside” may mask the true risk associated with these types of investments.
  • Most Autocallable Contingent Income Barrier Notes mature in approximately two to three years. The maturity date is typically when an investor would collect their principal, but that may not happen in the case of these complex structured notes.
  • Autocallable Contingent Income Barrier Notes are “callable,” meaning that the issuer can call them if the interest rates rise. At this point, the noteholder may choose if they want to start over with another note or another type of security.
  • If the issuer goes bankrupt, the investor will no longer receive payments.

What is an Autocallable Contingent Income Barrier Note?

There are two important “barriers” to keep in mind with an Autocallable Contingent Income Barrier Note.

Autocall Barrier

The “autocall” barrier is a price threshold for the stocks.

  • If the underlying stocks reach a certain price, the issuer automatically redeems the note.
  • The notes are callable at the principal amount every quarter if the official closing price of each underlying stock is at or above its call threshold.

Income Barrier

The “income barrier” kicks in if the underlying stocks drop below a certain point.

For instance, the Autocallable Contingent Income Barrier Note from HSBC USA states the following parameters for its notes:

  • If notes are not called and the least-performing underlying declines by more than 35%, the investor receives shares of the least-performing underlying security, and the investor will lose all or a portion of the principal amount.
  • These pay quarterly coupon payments of at least 2.95%, which is the equivalent of 11.8% per year.
  • These coupons are only payable if the closing price of the underlying securities is greater than or equal to 65% of its initial value.
  • HSBC notes mature in approximately three years, if not called.

The Prospectus for Autocallable Contingent Income Barrier Notes

Brokers recommending these notes to their customers are supposed to be aware of the risks outlined in the prospectus. For instance, the offering documents from a note Morgan Stanley issued state the following: “The securities do not guarantee the repayment of principal and do not provide for the regular payment of interest…Accordingly, investors in the securities must be willing to accept the risk of losing their entire initial investment and also the risk of not receiving any contingent monthly coupons throughout the 1.5-year term of the securities.”

Investors who did not know they were risking their entire investment may be able to sue their brokerage firm.

Why Did Autocallable Contingent Income Barrier Notes Lose Money?

Several of the “reference assets” had stock prices that declined in value. These included the following:

  • Peloton
  • Plug
  • Tesla
  • Affirm
  • Moderna

Who Lost Money?

The exact number of investors who have suffered losses is not yet known. However, we do know that Autocallable Investment Barrier Note investors were available from the following major issuers:  

  • BNP Pariba
  • HSBC
  • Morgan Stanley
  • Merrill Lynch / BOA
  • RBC

What Can a Securities Lawyer Do for Me?

Securities lawyers can help investors who may have suffered losses following broker misconduct. Brokers are required by FINRA to only recommend investments that suit their investor’s needs. (Read more about FINRA Rule 2111: “The Suitability Rule.”) The fact that these bonds risk losing the entire principal investment makes them unsuitable for many investors. Investors who expressly stated that they wanted conservative investments should not have been placed in these high-risk notes.