Barclays’ $473,000 7.75% autocalls on Nasdaq, Dow provide fixed rate, short-term play

By Emma Trincal

New York, Oct. 14 – Barclays Bank plc’s $473,000 of autocallable notes due June 30, 2021 linked to the Nasdaq-100 index and the Dow Jones industrial average provide a guaranteed income over a short time horizon.

Since guaranteed coupons are expensive to price, the short maturity was intriguing at first glance, but not in this market, sources said.

The interest rate will be 7.75% per year and will be payable monthly, according to a 424B2 filing with the Securities and Exchange Commission.

The notes will be automatically called at par if each index closes at or above its initial level on any monthly valuation date after six months.

If the notes are not called, the payout at maturity will be par unless either index finishes below its barrier level, 75% of its initial level, in which case the payout will be par minus 1% for every 1% that the lesser-performing index declines from its initial level.

Barrier

“The pricing sounds about right,” an industry source said.

“You give up more protection with a 75% barrier relative to 70%. It means more upside.

“It’s also a nine-month and it’s autocallable after six. That’s pretty short term. It helps pricing.”

Time and yield

The impact of duration on pricing depends on market conditions, said a market participant.

“It’s not clear cut. But in general, the longer the term, the more expensive it is to pay the coupon,” this market participant said.

“However over longer periods of time, the market can go down more. So, the put option is worth more.”

Barrier protections are structured through the sale of exotic put options. The higher the barrier, the more capital issuers have available for pricing, giving investors a chance to earn a higher coupon.

“When you have a longer-dated paper, the issuer has more time for the put to be realized and to be valuable. On the other hand, the issuer pays more in coupon. These two factors compete against each other,” he said. But traditionally, the higher value of the put premium prevailed and facilitated the pricing of longer notes.

Term structure

The relationship between time and coupon size has been altered lately, he noted.

“It used to be the longer the maturity the higher the coupon. It’s not necessarily the case right now. In fact, this relationship has reverted itself in the past few months.

“Volatility has an impact, especially now. There’s significant volatility short term. Volatility premiums are valuable enough to price higher coupons. Why? It’s not hard to say: obviously it’s the Elections.

Investors are pricing higher than average volatility levels ahead of the major political event, which is expected to be complicated, lengthy and contested, he said.

“People expect things to settle but only later on.”

This volatility factor is playing in favor of shorter maturities for income-products, which are short volatility, he concluded.

Small bid

What can be established with no doubt is that a fixed rate will be lower than a contingent coupon all things being equal, he said.

“We don’t see fixed rates very often. That’s because investors prefer having a higher coupon than a fixed coupon.

“Now there is a universe of clients who prefer to have a coupon that stays the same.”

But this market participant said those investors were a minority.

“The small participation of the deal speaks for itself. People in general are willing to go for a contingent return if they can get more income. There is really a thirst for yield.”

Barclay is the agent.

The notes settled on Oct. 5.

The Cusip number is 06747QG43.

The fee is 0.7%.

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