Barclays’ autocallable step-ups tied to Euro Stoxx 50 show two distinct outcomes, likely cap

By Emma Trincal

New York, Dec. 15 – Barclays Bank plc’s 0% autocallable market-linked step-up notes due December 2018 linked to the Euro Stoxx 50 index give investors the possibility to score a 10% annual return in two different ways, one of which is short term via a call premium, which is a de facto cap, and the other at maturity if the index closes within a defined range. Other outcomes give investors full exposure to the index, sources said.

Whether sources considered the product as a reasonable investment or not depended on how bullish they were on the euro zone benchmark.

Terms

The first scenario is the autocall. The notes will be automatically called at par of $10 plus a call premium of 10% to 11% per year if the index closes at or above the initial index level on either call observation date, which will fall in January 2017 and December 2017, according to an FWP filing with the Securities and Exchange Commission.

In the second scenario the notes have not been called and mature. If the final index level is greater than the step-up value, 130% of the initial index level, the payout at maturity will be par plus the index return.

If the final index level is greater than or equal to the initial level but less than or equal to the step-up value, the payout will be par plus the step-up payment, 30%.

If the final index level is less than the initial level, investors will be fully exposed to the decline.

Value

A market participant who is not overly bullish on the Euro Stoxx 50 said he liked the notes as a source of alpha.

“The 10% a year is good value, and you can get it either way with the autocall or the step up,” he said.

“If the market is up 30% in three years, there’s a good chance that it will be up 10% after one year or 20% after two ... maybe up 9% and then 21%.

“The euro zone is growing, Japan is growing. Both have been doing QE, and they’re making noise about it. So to me, the lack of downside protection isn’t an issue.

“But with the U.S. in the path of raising rates and China slowing down, I don’t know if the global environment is going to give you 10% really. I don’t see 10% a year in the next couple of years.

“That’s why I like the deal. You have a shot at outperforming the market.”

Risk versus reward

More bullish investors, however, shared the same reasoning – the call is the most likely outcome – but for precisely that reason did not like the payout.

Steven Foldes, vice chairman at Evensky & Katz/Foldes Financial Wealth Management, expressed that opinion, saying that the call premium is the equivalent of a cap and that it is too low given that investors have to give up liquidity, dividends and protection.

“I don’t have any protection. If I don’t get called at the end of the first or the second year, I am fully exposed to the downside,” Foldes said.

Missing a rally

“But my view is that Europe has been beaten up in the past few years, so there’s a real possibility for a rebound,” he said.

Last year, the Euro Stoxx 50 fell 9.75% while the S&P 500 index rose 12%. So far this year, the S&P 500 is flattish, down less than 1%, while the Euro Stoxx has already shed more than 6%.

“We don’t like the notes for a number of reasons,” he said.

“Number one, if you look at where the index has been over the past two years, we’re expecting some reverse to the mean and some decent performance out of European stocks. With the relatively modest 10% a year call premium, you lose that opportunity to gain more.

“Second, there is no buffer or barrier, and one of the things we look in structured notes is downside protection.

“We think this asset class has the potential to outperform. There’s a good chance to be called at 10% and therefore to be subject to a 10% annual cap.

“After three years, you are uncapped but you have given up 10% in dividends.”

The Euro Stoxx 50 index offers a dividend yield of 3.3%.

“I’d rather just own the ETF as opposed to being capped here,” he said.

BofA Merrill Lynch is the agent.

The notes will price and settle in December.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.