Barclays’ leveraged notes with cap, 95% floor tied to Stoxx 50 show attractive protection

By Emma Trincal

New York, June 11 – Barclays Bank plc’s 0% notes due Jan. 3, 2020 linked to the Euro Stoxx 50 index offer an attractive tradeoff for moderately bullish investors eager to play defense, advisers said.

The payout at maturity will be par plus 1.25 times any index gain, up to a maximum return of 15% to 17%, according to a 424B2 filing with the Securities and Exchange Commission.

If the index falls, the payout will be par plus the return with a minimum payout of $950 per $1,000 principal amount.

Risk-adjusted return

“This looks very reasonable to me. You’re locking in your losses on the downside,” said Kirk Chisholm, wealth manager and principal at Innovative Advisory Group.

The reward-to-risk ratio of 3-to-1 was also attractive.

“You can have up to 15% on the upside compared to 5% on the downside. That’s a great risk-reward,” he said.

Almost full protection

The downside protection differed significantly from the typical buffer, he noted. A 5% buffer compared to this 95% protection would show an opposite picture. The buffered note in the worst case scenario could generate a loss of 95% of capital. With this note, the worst case would be a repayment of 95%.

“That’s basically a principal-protected note,” he said.

The 5% price drop from the current price corresponds to the current support on the chart, he noted.

He used the exchange-traded fund SPDR Euro Stoxx 50 as a proxy.

“It’s right around that. There’ some support around that level.”

The fund closed at $40.76 on Monday. The 52-week low is at $38.18, not far from the maximum loss level of $38.72.

No bells and whistles

Another advantage of the structure, he said, was its simplicity.

“It’s really easy to explain. Leverage on the upside plus cap and buffer for the protection,” he said.

“It’s basically an option strategy in which you buy the stock, sell a call and buy a put.

“But the way it’s packaged in a note makes it easier to understand for individual investors. You can also buy it in a small amount.”

Tradeoff

Among the disadvantages: the loss of dividends and the cap, he noted.

But those were “reasonable” tradeoffs necessary to be able to benefit from the asymetrical leverage and quasi full-protection.

The dividend yield on the Euro Stoxx 50 index is about 2.5%. But investors only miss this component of the return over a short period of time, he said.

“If you get 95% of your capital protected, it’s a small price to pay. It makes sense,” he said.

He did not object to the 15% cap either based on his market outlook.

“I don’t think it will go up more than that. If it does, I don’t think it will go up much more.”

In an increasingly uncertain market, the structure offers opportunities for investors who seek to invest in the index.

“It’s a strategy I like given this environment,” he said.

“You don’t want to take huge amounts of risk but you also want the exposure. You’ve got strong probabilities working for you.

“It’s hard to find something wrong with this note.”

A must

Carl Kunhardt, wealth adviser at Quest Capital Management, agreed.

“I’d do it in a heartbeat,” he said.

His first point was about diversification, the driving force of his practice.

“As an asset allocator, investing in international stocks is a must,” he explained.

“Once you agree on that, you can’t avoid Europe. The majority of international equity is going to be Europe. So I’m going to have exposure to this asset class anyway whether I like it or not.”

Short-term view

The timeframe was more complex to analyze.

“I don’t think things look too good for the next 18 months. This was not a good weekend for international trade relations.”

He was referring to the G7 summit, which took place this weekend.

“Trump left without signing the agreement. We’re going to have a trade skirmish.”

This environment in his view was bad news for European markets.

“They need us more than we need them. I don’t think it’s good for European trade,” he said.

“Still I need to allocate some funds to Europe. You can’t just sit on the sidelines. This note is ideal for that. I don’t think European markets are going to skyrocket. But it will go up a little. Having that kind of protection is a very good thing.”

Long-term

Kunhardt’s lack of enthusiasm for Europe is fundamental and increases for longer timeframes.

“They haven’t fixed their problem since 2008. They just kicked the can down the road.

“Having a monetary union without a fiscal union is a receipt for disaster long-term.”

“So no... I’m not very bullish long term or even short term. But this note is great for that. It’s actually the perfect match,” he said.

Barclays is the agent.

The notes will price on June 29 and settle on July 5.

The Cusip number is 06746XDY6.

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