Barclays’ buffer in dual directional notes tied to S&P give payout an edge, advisers say

By Emma Trincal

New York, Aug. 30 – Barclays Bank plc’s 0% buffered dual directional notes due Sept. 4, 2020 linked to the S&P 500 index appealed to advisers for its defensive quality, combining absolute return and buffer, which is not all that common.

The short tenor and “reasonable” cap did not hurt either, they noted.

The payout at maturity will be par plus any index gain, capped at par plus 18%, according to a 424B2 filed with the Securities and Exchange Commission.

If the index falls by up to 14.2%, the payout will be par plus the absolute value of the index return.

Investors will lose 1% for every 1% decline beyond 14.2%.

Surprise: a buffer

“It’s rare to see a buffer on these absolute return notes,” said Steve Doucette, financial adviser at Proctor Financial.

“It’s kind of neat because you’re guaranteed to outperform if things go really bad, not just with the absolute return but also with the buffer.

Most absolute return notes are structured around a barrier, according to data compiled by Prospect News.

It means that investors will get a positive return if the underlying falls up to the barrier threshold. But one basis point more in index decline will radically change their payout: losing the protection they are merely long the index, losing at least the amount of soft protection, he explained.

“It’s never a good thing when it happens to a client,” he said.

Cap scrutinized

The least attractive part of the deal is the unleveraged and limited upside, according to this adviser.

“The only thing I don’t like is the 18% cap, which is 9% a year,” he said.

“Every day analysts and strategists are saying that the market is going to be in a recession in 2019. But what does that mean for 2020? We could have a huge rally then.

“I don’t like the cap but it’s not a bad return. You could just underperform the market on the upside. That’s one risk.”

Trade off

One solution may be to slightly raise the cap to double-digit level while reducing the buffer to 10%, he said.

But this idea was not as elegant as it seemed because the upside risk was less significant than the risk of taking on losses despite the buffer.

“Who knows when the market is going to turn? That’s the problem.

“If I’m going two years out I would probably prefer to keep the 14% buffer and live with that 18% cap.

“After all, getting all those gains on the downside down to 14% and then having your losses cut by the buffer is definitely a winning strategy. You’ll outperform,” he said.

The upside “may not be as bad” as it appears.

“Not too many clients are going to complain about 9% a year unless the market is up 15% or 20%. If you underperform on the upside, you underperform. Consider this note as just a piece of your allocation. You still have a broader portfolio that captures the upside,” he said.

Right environment

For Jeff Pietsch, head of capital markets at the Institute for Wealth Management, the offering was timely as the U.S. blue chip market is now officially the longest-running bull market in history.

“On the face of it, it’s hard to see what’s not appealing about this note,” he said.

Pietsch was not overly concerned about the cap.

“We’re late in the market cycle and although we don’t anticipate a downturn based on the economy and recent earnings, the cap seems reasonable over a two-year period based on current valuations.

Because the late stages of a bull market may be followed by a pullback, the terms on the downside met the needs of cautiously bullish investors, he said.

Terms, cost

“Having an inverse protection with a buffer rather than a barrier looks very attractive late in this cycle,” he added.

The one-to-one exposure on the upside before the cap was not a drawback in his view given the current market environment.

“There is no acceleration but it’s a pretty good cap. As we move along the longest bull market in history I don’t really see any downside to this product,” he said.

Another advantage was the low fee set a 0.5%, according to the prospectus.

“The pricing looks very reasonable,” he said, adding that a lower cost to investors give the issuer more room to buy the options, hence providing better terms.

The low volatility may also be a factor.

“It’s advantageous in terms of pricing. I suppose the embedded options are cheaper,” he said.

Barclays is the agent.

The notes will settle on Wednesday.

The Cusip is 06746XNK5.

© 2015 Prospect News.
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