Barclays’ $47.26 million autocallable step-ups linked to Euro Stoxx 50 seen as return enhancer

By Emma Trincal

New York, Dec. 23 – Barclays Bank plc’s $47.26 million of 0% autocallable market-linked step-up notes due Dec. 20, 2018 linked to the Euro Stoxx 50 index gathered a large bid as the structure allows investors to generate a positive return during the life of the notes and at maturity.

“It’s more geared toward return than income,” a market participant said.

The notes will be automatically called at par of $10 plus a call premium of 13.1% if the index closes at or above the initial index level on Jan. 5, 2017. They will be automatically called at par plus a call premium of 26.2% if the index closes at or above the initial index level on Dec. 14, 2017, according to a 424B2 filing with the Securities and Exchange Commission.

If the notes are not called and 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, according to the prospectus.

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.

“Investors can get a call premium of 13% a year. If they get to maturity, they can get the digital if the index gain is less than 30%, in which case they outperform. In both cases, they get a double-digit return,” the market participant said.

But another source pointed to the risk-adjusted return of the notes and looked at it in a different way.

“You get 0% interest and you can lose all your principal? Interesting, I guess,” this industry source said.

No phoenix

The notes should not be compared to income products, said the market participant, due to the fact that payment of the premium and early redemption occur simultaneously. He compared the product with another common structure that also pays income on a contingent basis, phoenix autocallable notes.

Phoenix-type notes pay a contingent coupon on a periodical observation date if the underlying closes on that day at or above a coupon barrier. The call is triggered usually on the same review date. Its threshold is almost always the initial price while the barrier for the coupon is usually much lower.

“That way, it’s easier for investors to receive an income without being necessarily called,” explained the market participant.

The autocallable step-up note’s call premium and the phoenix note’s coupon share one characteristic: contingency, he said.

“But the contingent coupon on a phoenix is still a coupon. Here, it’s not really a coupon at all,” he said.

“You get paid if there’s a call. That means the notes stop. You get paid. Game over.

“It’s very different from a phoenix where you can get paid until maturity.”

Long-term gains

From a tax standpoint, the difference is “significant,” he said.

The call dates for Barclays’ deal are set on an annual schedule. The deal priced on Dec. 18, but the first review date is not on the anniversary date. Instead it falls on Jan. 5, 2017, nearly three weeks later, he noted.

“This is standard. They give you more than a year so you can get the benefit of long-term capital gains,” he said.

“All the deals I looked at are like that. It’s very common when your premium gets paid only if the notes are called.”

The notes are likely to be characterized as “pre-paid cash-settled derivative contracts,” the prospectus said, adding that the tax treatment for capital gains or losses was likely to apply.

In contrast, phoenix autocallable coupons, when paid, are taxed as ordinary income.

“If some people prefer the phoenix autocall it’s because it’s more of an income product. They have a chance to cumulate coupon payments over a longer period without being called,” he said.

“For some investors like retirees, it’s very important. They want the income.

“This note is a little bit different. It’s not really about income.”

Step

The step-up payment at maturity gives the product even more of an equity-like, performance-oriented profile, he said.

“With this note, you may go through the first year or the second year without being called, which means no income,” he said.

“This is why the step is so important. You can still earn 30% at maturity, or 10% a year, if the index is up less than 30%. It’s a lower return than the call premium, but you can considerably outperform in a flat market.

“If the market is up more, you’re long the index, no cap. You get the appreciation.

“An autocall premium that’s not really a coupon ... a booster at the end that can beat the index, one-to-one upside above the step and no principal protection on the downside ... this deal is geared toward performance. It’s less of an income product and more of a way to generate excess return.”

BofA Merrill Lynch was the agent.

The notes (Cusip: 06743T683) priced on Friday.

The fee was 2%.

© 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.