Barclays’ market-linked notes tied to MSCI Europe to offer full protection, ‘reasonable’ cap

By Emma Trincal

New York, Sept. 11 – Barclays Bank plc plans to price 0% market-linked notes due Sept. 16, 2021 linked to the MSCI Europe index, according to a 424B2 filing with the Securities and Exchange Commission.

If the index return is positive, the payout at maturity will be par plus the index gain, subject to a cap of at least 53.35%. If the index finishes flat or falls, the payout will be par.

“I love it. It has literally everything that I like in a note,” said Carl Kunhardt, wealth adviser at Quest Capital Management.

The choice of the underlying index is one item he liked.

As an asset allocator, Kunhardt said that he always has an international equity bucket in his portfolio.

“When you’re talking about international stocks, Europe is 60% to 70% of it anyway,” he said.

“The fact that they’re carving out Europe is not a big issue because you’re just going to end up with that allocation anyway in any diversified portfolio.”

With 400 constituents among large- and mid-cap stocks, the MSCI Europe index covers about 85% of the free float-adjusted market capitalization across 15 developed European countries.

The United Kingdom, France, Switzerland and Germany make for three-quarters of the index.

Terms

Kunhardt pointed to other aspects of the product he liked.

“It’s a very strong issuer. I really don’t have much concern on the credit side,” he said.

“It’s a major index, an asset class I’m going to have anyway.”

In addition, the full repayment at maturity is “very attractive,” and getting this type of protection over a four-year term is unusual.

“We see those notes on longer terms, like seven years. This is a middle-of-the-road note,” he said.

“Where do I sign? I’m not finding anything not to like, especially on a 50 basis points a year note.”

He was referring to the cost structure defined in the prospectus.

The sales commission and a structuring fee both paid to the dealer are $0.125 and $0.05, respectively, per $10.00 of principal, which totals 1.75% over the four-year term.

Trade-off

“Of course you’re going to have to pay for this somewhere,” he said.

The first concession for investors is to give up dividends, as it almost always happens in a structured note.

“Dividends outside of the U.S. are high, so you’re missing out on dividends. But you won’t get principal protection for free. You’re going to have to pay for it somewhere,” he said.

The cap is another concession investors have to make but one that still provides bulls with a fair incentive given the double-digit rate of return on an annual basis.

“The issuer is not going to take all of the risk. You’re going to pay for principal protection. It just happens that it’s a good trade-off,” he said.

Bullish note

Kirk Chisholm, wealth manager and principal at Innovative Advisory Group, said the notes are a better alternative to an outright investment in the index if the European equity market goes up, which he envisions for this asset class. The deal would be less appealing in a sideways scenario.

The obvious appeal of the product is the full repayment of principal at maturity regardless of the index performance.

“Anything with principal protection is appealing for most investors,” he said.

“Getting a 53% cap I think is a pretty reasonable cap for a four year. A lot of people would be happy with that.”

Investors are still subject to credit risk, however.

“That’s the only risk I see, especially over four years,” he said.

Not receiving dividends over that length of time is also a negative. The underlying index yields 2.4%.

“It adds up, but it will really have a negative impact if the market is going to be flat, and I don’t see this as a high probability.

“I think overall the trend for European stocks will continue to be higher unless we run into a major event, in which case the market could unwind and you would be protected.

“So this note I think is a better deal than the index itself.

“In fact I can’t see too many bad things about it.”

Barclays is the agent with Morgan Stanley Wealth Management as dealer.

The notes will settle on Thursday.

The Cusip number is 06746M305.

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