Barclays’ Super Track notes linked to Dow Jones industrial average offer value, sizable buffer

By Emma Trincal

New York, Oct. 2 – Barclays Bank plc’s 0% buffered Super Track notes due Oct. 30, 2020 linked to the Dow Jones industrial average give investors a “significant” amount of downside protection without capping their potential gains, adding value to the product, said Tim Vile, structured products analyst at Future Value Consultants.

The payout at maturity will be par plus any gain in the index, according to a 424B2 filing with the Securities and Exchange Commission.

Investors will receive par if the index falls by up to the 20% buffer and will be exposed to any losses beyond the buffer.

“It’s an attractive five-year product,” he said.

“The index has to rise because you don’t have the return enhancement. It’s a one-to-one exposure.”

Trade-off

Future Value Consultants rates each structured note with different scores that measure its risk, risk-adjusted return, value and overall quality. Products are compared against “all products,” which is a sample of recently rated notes across all structure types, and “the same product type,” which is the category to which the product belongs.

With this note, the product type is “unleveraged return.”

Giving up leverage is part of a trade-off. It offers some benefits to investors, he explained.

“First, you get the uncapped upside. A cap is usually the price you have to pay for the leverage.

“Second, you get this nice buffer. A 20% buffer on the Dow Jones is substantial.

“But it’s a five-year. Giving up leverage is not enough to buy you a 20% buffer. You also have to extend the maturity. This is what this product does.

“You get the buffer and the no cap, but in exchange you invest in a longer-dated product and you have to give up the leverage.”

As a result of this trade-off, potential investors in the notes have a “mixed” profile, he said.

“You have a mixed profile because this is a very defensive note with unlimited upside potential,” he said.

“A moderately bullish investor would not mind a cap and would probably want some leverage.

“This is the opposite. You have a product geared toward an aggressively bullish investor.”

Meanwhile, the risk profile is also mixed, he noted.

“There’s this 20% buffer. That’s for a relatively skittish investor. At the same time, you have to be ready to invest in an index that has already declined by almost 9% this year.

“For some, the [almost] 10% decline is a good thing because you get a better strike. But a conservative investor would shy away from a five-year commitment into a market that’s already showing signs of a potential decline.”

Riskmap

Future Value Consultants measures the risk, or “riskmap,” by adding two risk components – the market riskmap and the credit riskmap. Each score is established on a scale of zero to 10 with 10 representing the maximum amount of risk.

At 1.86, the market riskmap is lower than the 3.56 average for the same product type, according to Future Value Consultants’ research report.

“The market risk is very low. That’s due to the 20% buffer. Not all notes in the unleveraged return category are buffered, and certainly not all of them have buffers of that size,” he said.

“It’s also because the Dow Jones industrial is not among the most volatile underlying,” he added, pointing to the index’s implied volatility of 21%, which is one percentage point below the implied volatility of the S&P 500 index.

“Some underlying indexes, sectors or asset classes and stocks can be much more volatile than that,” he said.

The credit riskmap of 0.89 is greater than the 0.43 average for the unleveraged notes category, according to the report.

“The credit risk is higher. It’s due to the five-year term. Barclays is not the best or the worst credit, but it’s still a good credit. So this is the result of increased risk exposure due to time.”

Overall, the riskmap is 2.74 versus an average of 3.99 for the same product type.

“This product is on the lower end of the risk spectrum compared to its peers,” he said.

Return score

Future Value measures the risk-adjusted return with its return score. The rating is calculated using five key market assumptions: neutral assumption, bull and bear markets and high- and low-volatility environments. The best market assumption is used to compute the return score, which in this case would be the bullish scenario.

This product shows a return score of 8.26 versus an average of 8.75 for similar products and 8.30 for all products.

“It’s average compared to all products, but it’s still high, although a bit lower than the average unleveraged product,” he said.

“What helps is the uncapped return plus the very low riskmap.

“I’m not sure exactly why the return score is slightly lower than the average for the same product type.

“Most of the non-leveraged notes are also uncapped, so that’s not why.

“It could be that similar products may have even more defensive features than this one.”

Pricing

For each product, Future Value computes a price score that measures the value to the investor on a scale of zero to 10.

This rating estimates the fees taken per annum. The higher the score, the lower the fees and the greater the value offered to the investor.

The notes have a 7.98 price score versus an average of 6.27 for the product type

“It’s not very surprising to see such a high price score. The notes offer a lot of value to investors,” he said.

“It’s tied to a very liquid index. The return is uncapped. The buffer is very strong.

“And it’s a five-year. The time factor is key because the longer the duration, the longer you can spread out those fees. Longer products will always score better on the price scale.”

Overall score

The overall score measures Future Value Consultants’ general opinion on the quality of a deal. The score is the average of the price score and the return score.

The notes have an 8.12 overall score while the average for the product type is 7.54.

“The price score really helps a lot because the return score is a little bit lower,” he said.

“This is a solid structure. In one single product, you can have a good defensive feature with unlimited, complete upside exposure.

“This is for people who want to be long the index with some substantial downside protection. It’s a well-balanced structure which could appeal to a variety of investors.”

Barclays is the agent.

The notes will price on Oct. 27 and settle on Oct. 30.

The Cusip number is 06741UM27.

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