Barclays’ $50 million contingent coupon notes tied to indexes spotted as institutional trade

By Emma Trincal

New York, March 28 – Barclays Bank plc’s $50 million of callable contingent coupon notes due March 26, 2021 linked to the least performing of the S&P 500 index, the Russell 2000 index and the Euro Stoxx 50 index were seen as a one-off trade for an institutional client.

Big deal

“It’s a big deal and they went for a big coupon,” a market participant said.

The notes pay a contingent coupon at an annualized rate of 18.5% if each index closes at or above its coupon barrier level, 80% of its initial level, on every trading day that quarter, according to a 424B2 filing with the Securities and Exchange Commission.

The notes will be callable in whole at par on any quarterly redemption date after six months.

If each index finishes at or above its barrier level, 80% of its initial level, the payout at maturity will be par.

Otherwise, investors will be fully exposed to the decline of the least-performing index.

“It’s a very large coupon... more than what I’ve seen in recent memory,” the market participant said.

Institutional client

Keith Styrcula, chairman of the Structured Products Association, said the notes were likely to have been sold to an institutional client of the issuer.

“My guess, based on the size of the deal and the low compensation, is that it’s a pretty tight deal, some sort of institutional play,” he said.

The fee is only 60 basis points, according to the prospectus.

“It’s a pretty good bet that it’s a negotiated institutional transaction.”

“I’m not certain it’s a roll because it’s not a one-year and it’s a round number.

“There’s going to be one investor on the other side, especially if no broker-dealer is named in the offering document,” he said.

“It’s Barclays selling their paper.”

An example

Styrcula added that institutional investors should take notice.

“The sales concession is very cost-effective for an institution. It’s 20 bps per annum, cheaper than an ETF. Institutional investors should look at these trades.”

Worst-of deals are not typically used by institutions. But the coupon size commands attention.

“OK, it’s a worst of, it’s based on three indexes. But what’s the likelihood that it’s going to drop 20%. It’s a pretty safe bet over the course of three years.

“I really think it’s a good institutional play,” he said.

Barriers

The market participant agreed the deal was probably designed for an institutional buyer. But he stressed some of the risky elements of the trade.

“For the coupon, the American style is riskier because you can lose your coupon any day on any given quarter,” he said.

When a barrier is observed any day as it is the case in this deal with the coupon barrier, it is known as “American.” More commonly used is the European barrier, which is observed point to point.

But the barrier size was also thin.

“It’s only 20%, which is not a lot,” he said.

The standard for these kinds of products on a three-year would be more like 25% to 30% in contingent protection, he said, adding that a 30% to 40% barrier would be on the conservative side.

Risk-tolerant profile

“This product is priced more aggressively for a more aggressive investor, which you would expect for that type of yield,” he said.

On the other hand, the early redemption at the option of the issuer was not seen as a drawback.

“It may enhance your coupon a bit, and people don’t care if it’s callable or autocallable, really,” he said.

“Whenever the autocall will call, the discretionary call will call as well.”

“This is not your typical worst-of. It’s not conservative either. It’s fairly aggressive.

“It’s interesting to see that the smaller protection and the high coupon won the day.”

Barclays is the agent.

The notes priced on March 23, but the initial prices were struck at the closing levels of the previous day.

The Cusip is 06746X3D3

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