Barclays’ buffered PLUS linked to Euro Stoxx 50 index appeal to advisers for high cap, terms

By Emma Trincal

New York, April 4 – Barclays Bank plc’s 0% buffered Performance Leveraged Upside Securities due Nov. 5, 2018 linked to the Euro Stoxx 50 index offer attractive terms with two times upside leverage and a 10% buffer, but advisers were mostly focused on the cap, which they said competes advantageously with a long-only investment in the index fund.

The cap for the 30.5-month period is 37.1%, according to an FWP filing with the Securities and Exchange Commission. It represents the equivalent of 13.25% on an annualized compounded basis. As a result, investors achieve the maximum return if the index grows at a rate of 7% a year.

Carl Kunhardt, wealth adviser at Quest Capital Management, said that his “pessimistic” outlook on European stocks helps him accept the cap.

“I’m usually not a fan of caps. The way I usually think about it is if you’re going to give me leverage on the upside, don’t give me a cap that’s going to take the leverage away,” he said.

Good cap

But investors should also use their judgement based on their market convictions.

“I’m not very optimistic on Europe in the near term,” he said.

“My very sluggish view on the asset class makes the note pretty attractive.

“The cap becomes less of an issue if not an immaterial issue because I don’t think you’re ever going to hit the cap.

“I don’t see the Euro Stoxx up 7% a year for the next two and a half years. I really don’t.”

On the downside, the 10% buffer is also beneficial to noteholders.

“If I buy the index directly, I’m not getting any of that,” he said.

“And if I wanted to replicate the two-time leverage, I would also have to get the leverage on the downside too, which isn’t good.

“So now I can get a 7% return in the index, and through the magic of financial engineering I just made it a 13% return with less risk. It more than offsets not getting the dividends.”

The Euro Stoxx 50 has a 3.34% dividend yield.

Negative outlook

Kunhardt explained what causes him to have a gloomy outlook on Europe. The euro zone economy is “not generating growth,” in his view, due to a “dysfunctional” economy that is the result of a monetary union that comes without any joint fiscal policies. He added that the refugee crisis will likely worsen the fiscal deficits for most countries, which already weighs on the economic growth in the union.

“Because of all these issues I don’t expect very high returns in Europe. And yet, Europe makes for approximately 70% of any international allocation, so you’ve got to be in it. If the Euro Stoxx gives you 7% – and it’s a big if – then you get a 13% return. That’s a great cap,” he said.

“I always like buffers. But more than the buffer, this cap would be the principal driver behind buying this product.”

Excess return

Michael Kalscheur, financial adviser at Castle Wealth Advisors, also pointed to the upside as one of the main reasons that make the deal enticing.

“To get that kind of a cap for that kind of short period of time is very impressive,” he said.

Based on a table of historical returns he compiled for the Euro Stoxx 50 since 1986, he found that for a 30-month trailing period, the index had been at or below the cap nearly 70% of the time.

“Your chances to outperform on the upside are quite good,” he said.

Shortcomings

One drawback is the creditworthiness of Barclays compared to other issuing banks.

Barclays’ credit default swap spreads were at 135 basis points on Monday, according to Markit. In comparison, U.S. banks have tighter spreads ranging from 75 bps to 110 bps.

“Barclays’ spreads could raise a red flag for me. The good news though is that you can get really good terms,” he said.

Another less attractive aspect of the deal is the high dividend yield investors must forego when investing in the notes. Over the term, investors incur about 8.35% of opportunity cost as a result.

“It’s a big dividend to overcome over that period of time,” he said.

“Yet you are very likely to outperform the index anyway, especially if the market is slightly up. The leverage and the cap make it very easy to make up that difference. On the downside, you can also beat the index. Your 10% buffer is more than what you give up in dividends.

“What I really like is that you win in most of the cases. I would think you can outperform the index two-thirds of the time.”

Overall

Most of his typical objections were offset by the terms and the probability of a winning outcome.

“You’ve got a high dividend index and a bank that’s got some spreads to utilize. They put together a very compelling offering. This is a product that can deliver better returns than the index itself even without the dividends,” he said.

The fee is 3%, including commission and structuring costs, according to the prospectus.

“That’s a bit more than my usual target. I like to keep it at less than 1% a year,” he said.

“But you have a nice fat lever, a very strong cap and a 10% buffer on an intermediate term note.

“I could quibble with the CDS spreads. I could quibble with the fees. But overall, the terms of this offering are very, very good.

Barclays is the underwriter. Morgan Stanley Wealth Management is a dealer.

The notes will price April 15 and settle April 20.

The Cusip number is 06744K616.

© 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.