Barclays sells two issues of index-linked notes aimed at two kinds of investors

By Emma Trincal

New York, Sept. 6 – Barclays Bank plc priced two issues of $1.48 million each of 0% SuperTrack notes due Sept. 5, 2024 showing strong similarities, including size, pricing date and maturity date but designed for two different types of investors based on the tradeoffs required to achieve some of the benefits included in each product.

The first deal – 0% buffered SuperTrack notes due Sept. 5, 2024 linked to the S&P 500 index – will pay at maturity par plus any index gain up to a cap of 16%, according to a 424B2 filed with the Securities and Exchange Commission.

Investors will receive par if the index falls by up to 27% and will lose 1% for each 1% decline beyond 27%.

The other offering consists of 0% barrier SuperTrack notes due Sept. 5, 2024, which are linked to the least performing of the S&P 500 index and the Dow Jones industrial average, according to a separate 424B2 filing with the SEC.

If the least-performing index’s return is positive, investors will receive the least-performing index’s gain. If the least-performing index declines by 30% or less, the payout will be par. Investors will lose 1% for each 1% that the least-performing index declines from its initial level if it falls by more than 30%.

Barrier preferred

“I prefer the barrier one,” said Tom Balcom, founder of 1650 Wealth Management.

“Both the S&P and the Dow are down quite a bit from their 52-week highs in January,” he said.

When the notes priced, the S&P 500 index closed at 3,986.16, or 17.3% off its Jan. 4 high of 4,818.62. The Dow finished at 31,790.87, or 14% lower than its 52-week high of Jan. 5.

“You’re starting from these lows. I think it’s unlikely that two years from now any of those two indices would drop an additional 30% unless we are in a deep recession,” he said.

“And the positive aspect of this one product is that you have an uncapped upside. With the buffered one, a 16% cap in two years means that you get capped out pretty quickly. And you’re not getting much return. The cap is about 7.7% per year compounded.

“I feel confident about the downside with the 30% barrier because of the entry points. If we were at all-time highs, I would probably choose the buffer.”

High correlations

The tradeoff for getting the uncapped upside is two-fold, he said. The downside protection is not a hard buffer, but a barrier. The barrier size of 30% is slightly larger than the 27% buffer, but not enough to make a difference, he said. The other “compromise,” he added is the exposure to the worst-performing of two indexes rather than to a single index.

Balcom downplayed the concern some may have with the worst-of.

“I think it doesn’t make a big difference. The S&P and the Dow have a high correlation to one another. Both should have similar returns. If it was the S&P with the Euro Stoxx 50, yes, I would be more concerned,” he said.

For investors, the main choice was between a weaker protection with unlimited upside versus a more solid downside protection but at the price of a cap on the upside.

“I think the barrier is large enough and the entry points low enough to lead me to go for the no cap solution,” he said.

Two-year tenor, Elections

Both notes have a two-year tenor. Investors need to analyze the risk involved with a shorter-dated security in today’s environment. For some, a two-year term may be too short if the market is at the early stages of a bear cycle as it may not leave enough time for a rebound by the time the notes mature, he said.

“It’s true that two years is short, but again, we’re starting at low entry levels. You would really need a serious economic crisis to push the market down another 30%,” he said.

Both notes mature on Sept. 5, 2024, two months ahead of the Presidential Elections, he noted.

“While this is a time when markets typically get more volatile, I think it could play in your favor here.

“The party in office can’t afford to have a recession just before the Elections. They would do whatever it takes to jump start the economy,” he said.

In October 2008 as the financial crisis was spreading around the world and just a month before the November U.S. Presidential Elections, the Federal Reserve, working in coordination with other central banks, cut rates by half a percent.

“They would do what it takes. It doesn’t have to be a rate cut. It may just be some kind of stimulus. But no incumbent president can afford a recession just before an Election,” he said.

Dispersion risk

Donald McCoy, financial adviser at Planners Financial Services, pointed to some of the risks involved with the worst-of exposure.

The Dow and the S&P 500 index are “highly correlated” but on the downside one can easily underperform the other, he said.

For instance, if the S&P 500 finished down 25% and the Dow ended 31% lower, the outcome would be damaging for investors.

“Because you’re looking at the worse of the two, you would still lose 31% even though the S&P is above the barrier,” he said.

On the other hand, the worst-of structure had unlimited upside, he noted.

“The choice here really depends on your market outlook. If you feel remotely positive, it makes sense to use the barrier note with no cap on the upside.

“Besides in both cases, you’re given a pretty large downside protection. Twenty seven percent, 30%. These are almost bearish levels,” he said.

Buffer vs. barrier

“The difference is really in terms of quality,” he said.

“The buffered protection clearly is much better than the barrier type.

“I guess it all boils down to this question: what downside protection are you willing to sacrifice for the uncapped upside?

“Obviously the hard buffer is preferable, but you pay for that with the cap.”

He offered an example: if the market returned 30% in two years, investors in the buffered note would only get 16%.

A note for everyone

“If you’re a conservative investor focused on protecting your principal, it’s not the end of the world,” he said.

The ultimate conservative strategy for those who believe the market is headed downward is to keep a large allocation to cash, he said.

“It’s not a bad thing to sit on the sidelines when the market is volatile and if you’re concerned about losses,” he said.

Despite their similarities, the deals are designed for very different types of investors, he noted.

“If you’re a moderate, conservative investor, you want the buffered notes just because the hard buffer gives you more protection. Your main goal is to protect yourself against big losses, not necessarily to achieve huge returns.

“More aggressive clients would want to do the second deal, the one with the barrier. They seek a higher rate of return and they’re willing to take on more risk.”

Use caution

What would be the best strategy given current market conditions? No one knows, he said, although risk has resurfaced since mid-August.

“People for a couple of months this summer were under the impression that the bear market was over. We had a strong rally from mid-June to mid-August. Since then, the market has been on a losing pattern for a good three weeks. It does seem to indicate that the gains of June and July were just a bear rally,” he said.

Since mid-August when the rally ended, both the S&P 500 index and the Dow have declined by 9%.

“If you expect further down swings, it makes sense to either sit in cash or use the most conservative product, the one with the 27% buffer,” he said.

Barclays is the agent for both issues, which settled on Friday.

The Cusip number for the buffered notes is 06748XR52.

The Cusip number for the barrier notes is 06748XR29.

The fee for each deal is 0.75%.

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