Barclays’ autocallable range accrual notes tied to Tesla offer deep barrier, accrual payment

By Emma Trincal

New York, Nov. 12 – Barclays Bank plc’s autocallable range accrual notes due Nov. 22, 2017 linked to Tesla Motors, Inc. shares differs from similar products in that it pays an accrual coupon, which is not common for a contingent autocallable note, sources said.

Interest will accrue at 9% annualized for each day that Tesla Motors shares close at or above the barrier level, 55% of the initial price. Interest will be payable monthly, according to a 424B2 filing with the Securities and Exchange Commission.

The notes will be called if the stock closes at or above its initial level on any quarterly call valuation date.

The payout at maturity will be par unless the stock finishes below the 55% barrier level, in which case investors will be fully exposed to any losses.

Accrual coupon

“We’re seeing a lot of those autocall deals, sometimes with a basket, most often with single names, like Facebook, Amazon and so on,” a structurer said.

“It’s a volatility-based play. You get the 9% accrual coupon times the number of days the stock is above 55% for the period. And at the end you have this 55% barrier too if you’re not called. Things would really have to bottom up for you to breach this level, so chances are you’re going to get paid something.”

In his view, the structure was more protective than aggressive.

“We’ve seen deals like that with higher strikes and higher coupons. This is just another way to price it,” he said.

What made the notes different from other autocallable contingent coupon deals seen in the market recently was the accrual feature, he said.

Usually it’s not accrual,” he said, explaining that typical contingent coupons are binary – either the investor gets paid the full coupon or get nothing. With an accrual coupon, investors will receive an interest rate in a range between zero and 9% per annum.

If on the 20 trading day monthly period, the stock closes above the 55% barrier on 15 days, the accrual factor will be 75% and the effective interest rate 6.75% per annum or 0.53% for the month, according to an example in the prospectus. If the condition is met on each 20 days of the period, the full 9% per annum coupon will be paid.

If the stock never closes above the barrier during that month, investors will not receive any interest, the example showed.

Barrier

“Perhaps they did the accrual to extract a little bit more coupon. If it gives you an extra point on the coupon it makes sense,” a sellsider said.

“But from my perspective, with a stock like Tesla, if they had slightly increased the coupon maybe by raising the barrier a little, it would have looked more attractive.”

Instead the issuer chose to emphasize the protection, he said, which is probably in response to the client’s preference.

“That way, if you like the stock, it would take a very significant market decline or a very specific company event to breach that barrier,” he said.

Tesla Motors has an implied volatility of 36% compared to 10.5% for the S&P 500 index.

“Fifty five percent looks really good on the downside. But it’s hard to judge if there’s enough protection for that stock. It would require having a good feel for Tesla volatility, which obviously is high,” a market participant said.

“I don’t have a good sense of the pricing on that name. The terms look great. But we all know Tesla is very volatile. If it was JPMorgan or General Electric, it would be a very different story.”

Maturity

The three-year tenor was also “interesting,” this market participant noted.

“As you go out in time that volatility curve is going to flatten. Three years, that’s pretty long. This may be the best point of the volatility curve, three years or so. I’m guessing that five or 10 years is where the volatility is lower because the whole future of the company is going to play out in three years.

“Time is definitely an important factor here. You get more volatility on a shorter-dated note but volatility is not just a function of volatility levels. It’s also a function of time.”

An industry source pointed to the barrier as “much lower” than the “average stock deal” because “Tesla is super volatile.”

The stock is up 65.6% this year, fluctuating between a 140 low and 291 high. It closed at 249.10 on Thursday.

“You’re selling volatility. You’re able to lower the barrier significantly. Most Phoenix have a 75% or 80% barrier. But here, you’ve got a lot of premium to be able to price the barrier lower,” he said.

A phoenix autocallable note is one in which the autocall barrier, usually at the initial price, is higher than the coupon barrier. The two strikes structure enable investors to collect a coupon during one or several observation dates without having to incur an early redemption.

“The 9% coupon looks attractive too,” this source said.

“The barrier is very low. It’s hard to say if it’s enough. You’d have to price it and take into account the volatility of Tesla. But usually those deals get priced pretty fairly. You don’t tend to see huge gaps from an issuer to another. Everybody prices the same way because those structures are simple, fairly common and therefore, fairly transparent,” he said.

Barclays is the agent.

The notes will price on Nov. 17 and settle on Nov. 20.

The Cusip number is 06741ULT9.

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