Barclays' five-year phoenix autocallables linked to Verizon seen as short-term income play

By Emma Trincal

New York, June 25 - Barclays Bank plc plans to price trigger phoenix autocallable optimization securities due June 29, 2018 linked to the common stock of Verizon Communications Inc., according to an FWP filing with the Securities and Exchange Commission.

Barclays also plans to price two similar deals linked to the stock of Citigroup, Inc. in one product and to that of CSX Corp. in another one.

Three coming up

If Verizon stock closes at or above the trigger price on a monthly observation date, the issuer will pay a contingent coupon for that month at the rate of 7% per year. Otherwise, no coupon will be paid that month. The barrier price is expected to be 69% to 73% of the initial share price and will be set at pricing.

Beginning July 1, 2014, if the shares close at or above the initial price on a monthly observation date, the notes will be called at par of $10 plus the contingent coupon.

If the notes are not called and Verizon shares finish at or above the trigger price, the payout at maturity will be par plus the contingent coupon. Otherwise, investors will be exposed to the share price decline from the initial price.

The notes linked to Citigroup have a contingent coupon of 8% per year. The barrier price range is 71% to 75% of the initial price.

The notes linked to CSX have a barrier price expected to be 69% to 73% of the initial share price. The contingent coupon is also 8%.

All three products have the same June 29, 2018 maturity date. The observation frequency is monthly on all three notes, and the conditions for the automatic call, coupon payment and repayment of principal are the same.

Income play

Dean Zayed, chief executive of Brookstone Capital Management, said that the notes were attractive as part of an income strategy.

"I like these. This type of structure highlights the very beauty of structured products in that you have a defined return provided that some conditions are met. You know what you're getting, no more, no less. It's the whole idea of structured products," Zayed said.

"This one, clearly, is an income play.

"If you understand how the barrier works, how the callability works, these notes are extremely attractive. Investors know exactly what they're getting."

One of the arguments against autocallable structures is often that the return is capped at the coupon level. But Zayed said that it was not a real drawback for those investors looking for yield.

"You're not relying on participation. You know the return you're going to get as long as the terms are met," he said.

While five years may appear like a long time for an autocallable structure, Zayed said that the effective length of the product may end up being less.

"Five years is not an extended period of time," he said.

"First of all, it's very likely that the notes are going to be called.

"And second, if people can get the potential to earn 8% a year, most people would be happy with that. Assuming you're getting the coupon only 75% of the months, you're still doing pretty good. The notes remain attractive."

In general, callability offers opportunity for investors, he added.

"You can get your money back and seek other opportunities elsewhere. People know that getting called away is not a losing proposition. It's the reality of the product," he said.

25 bps world

Jim Delaney, portfolio manager at Market Strategies Management, said that the notes were designed for short-term investors seeking income.

"It's an income play. A 7% per annum is definitely great in a 25 basis points world," he said, referring to the Federal Funds target rate.

Investors interested in the product are likely to expect only moderate moves in the market, he said.

"The type of investor who would find value in this type of note would be someone who anticipates only a very slow decline in the stock market because it's best for you to collect the coupon as long as possible, in other words to be anywhere between 70% and 100% of the initial price. You don't want the price to break too much either. An investor would have to have a view on what kind of market we're going to have. They're likely to expect a sideways to slightly down market," he said.

The recent sell-off increased the odds of an automatic call, he said, making it unlikely that investors would remain invested until maturity.

"With the 4% pullback that we've just had, if they price it today, there's a pretty good chance that they're going to call it," he said.

"... A 7% annualized coupon is fantastic in this rate environment. You get one month of it, you're already ahead of the game.

"Five years is not an issue here. I don't see any way you're going to own this thing for five years. ... We had a sell-off. But we're already having a lot of positive economic news in terms of housing sales, consumer confidence. All this increases the chances of getting called."

UBS Financial Services Inc. and Barclays are the underwriters for all three upcoming products, which are expected to price Wednesday and settle Friday.

The Cusip number is 06742D747 for the notes linked to Verizon, 06742D721 for the notes linked to CSX and 06742D739 for the notes linked to Citigroup.

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