Barclays’ dual directionals on Euro Stoxx show attractive terms, yet some advisers are skeptical

By Emma Trincal

New York, March 28 – Barclays Bank plc’s $1.77 million of 0% barrier dual directional notes due March 23, 2029 linked to the performance of the Euro Stoxx 50 index offer compelling features. But some advisers questioned their usefulness and therefore, cost.

If the index’s final level is greater than its initial level, the payout at maturity will be par plus 300% of the return, subject to a maximum payout of par plus 80%, according to a 424B2 filing with the Securities and Exchange Commission.

If the index’s final level is less than or equal to its initial level but greater than or equal to its barrier level, 70% of its initial level, the payout will be par plus the absolute value of the index’s return.

Otherwise, investors will lose 1% for every 1% that the index declines from its initial level.

Barrier, tenor

Scott Cramer, president of Cramer & Rauchegger, said the structure offered value.

“30% protection and I get the absolute return. I like this,” he said.

On the downside, the terms provided risk mitigation.

“First off, longer deals usually tend to lower the risk.

“Statistically even the chances of losing more than 40% on a five year are slim. So, it’s even more of a stretch for 30%.”

A trigger bringing the index below the barrier at maturity would have to be a shock created by a sudden and unforeseen event, he said.

“In this case, it could be some kind of geopolitical event. We have a lot of geopolitical risks around the world right now. Still over five years the downside protection is adequate. And you still get something with the absolute return.”

Excess return

Cramer said the upside payout was just as attractive.

“I like the idea of getting levered three times. The 80% cap gives you the ability to outperform,” he said.

The 80% maximum cap over five years with a three-times leverage multiple is the equivalent of a 12.5% annualized compounded return, which can be achieved if the index rises 4.85% per year.

With the potential to also outperform in a down market, the note may deliver alpha.

Growth

“You just have to be comfortable being locked in for five years,” he said.

Not every client is willing to hold a note for that long, he said.

“We do have clients who buy five-year notes. But they usually receive a coupon. Those notes are income-producing. With this one, it’s different. What you have here is a growth vehicle,” he said.

The issuer was able to price the cap with leverage and the barrier with absolute return by taking advantage of the high-yielding index. Noteholders do not receive the dividends of an underlier, and the Euro Stoxx 50 index offers a 3.12% dividend yield.

“Sure, you’re not getting the dividend. But it’s not the way I think about these things. It’s not a fair comparison. A note should give you upside potential with protection and this one certainly does. You’re not getting this with the index. On top of that, the note can generate gains on the downside and again you’re not getting this with the index.

“I think it’s a pretty good deal,” he said.

Absolute return

Steve Doucette, financial adviser at Proctor Financial, questioned the benefit of the absolute return and barrier.

“You get the absolute return. But what are the odds of an absolute return five years out? In my personal experience I’ve never seen an absolute return pay off. And how much barrier protection do we need over five years?

“I can’t imagine having any use for the 30% protection and the absolute return. Not on a five year,” he said.

Doucette suggested a change to improve the upside.

“I would look for a 5% buffer and get rid of the cap,” he said.

Disappointing track record

Additionally, Doucette was not overly bullish on the European market.

“The Euro Stoxx had a good run last year. In fact, it slightly outperformed the S&P. But in the past 10, 15 years it has consistently underperformed the U.S.,” he said.

The Euro Stoxx 50 rose 27% last year versus 24% for the S&P 500 index.

But Doucette remained skeptical.

“Is Europe really going to catch up over a five-year period? Can they step in in tech innovation and really compete with us?” he said.

With a 16.4% weighting, technology is only the fourth sector allocation in the Euro Stoxx 50 index behind financials, consumer discretionary and industrials, which together make for 56% of the index.

Even asset allocators tend to European to be unsure about the growth prospects of Europe, he noted.

“How many asset allocators will invest in the Euro Stoxx directly for their global allocation? Most people use big U.S. benchmarks like the S&P and the Nasdaq to get exposure to some of the largest U.S. corporations, which are doing business all around the world.

“It’s hard to have a long-term view on Europe. This note offers value on the downside. But I can’t imagine being able to take advantage of it,” he said.

Playing it both sides

Jeff Pietsch, founder of Capital Advisors 360, found the structure relatively expensive.

“On such an extended period of time, the three times leverage increases the odds of getting that 80% target return. That’s your baseline,” he said.

He pointed to the robust performance of the index, which is up 32% since October.

“If an adviser is conflicted with the large returns seen recently, it’s a way to play both sides unless we have a bear market. But even in a bear market, the five-year period should be enough for the market to recover,” he said.

Despite these advantages, Pietsch had some objections, starting with the 3.85% fee disclosed in the prospectus.

Costly features

“The cost of the leverage is high. That 77-basis points annual fee is expensive,” he said.

The issuer also used the dividends to finance the leverage, he noted.

The 3.12% annual dividend yield over five years, which noteholders do not receive, represented a high opportunity cost, he said.

“Overall, you have a double-digit opportunity cost due to unpaid dividends; you have a cap; and the fee is large,” he said.

Pietsch questioned the timeliness of the bet as the index has recently surged. He also questioned the value of some of the terms when applied to a longer-dated product.

“I wonder why you would play the dual directional on a five-year term,” he said.

“I can see it as more appropriate for a one year as we have more uncertainty short term given the recent gains.

“Personally, I don’t really think the dual-directional feature is that useful. I just think the chances of being able to benefit from it over five years are slim.”

Barclays is the agent.

The notes settled on Monday.

The Cusip number is 06745QCE7.

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