Barclays’ buffered autocalls on Nasdaq, Russell to outperform worst-of if held to maturity

By Emma Trincal

New York, Oct. 14 – Barclays Bank plc’s 0% leveraged buffered autocallable notes due Oct. 17, 2024 linked to the least performing of the Nasdaq-100 index and the Russell 2000 index provide two ways of making money – one year from now via a call premium if the market is flat or up, or alternatively, through leverage at maturity if it’s up.

The notes will be automatically called at par plus 8.5% if each index closes at or above its initial level on the Oct. 13, 2022 observation date, according to a 424B2 filing with the Securities and Exchange Commission.

If the notes are not called and each index finishes at or above its initial level, the payout at maturity will be par plus 1.25 times the return of the least-performing index.

If the worst-performing index finishes negative but at or above its 85% buffer level, the payout will be par.

Otherwise, investors will lose 1% for each 1% decline of the worst performer beyond the 15% buffer.

Seen before

Other issuers have offered similar structures combining a single call, usually after one year with uncapped participation at maturity if the notes are not redeemed early.

Some of those issuers include JPMorgan Chase Financial Co. LLC, Morgan Stanley Finance LLC, Citigroup Global Markets Holdings Inc., HSBC USA Inc. and BNP Paribas, according to data compiled by Prospect News.

Early on this year, some of those deals were structured around a single index or a single ETF. The term usually was longer (three or five years) although not always. GS Finance for instance priced in August a two-year deal tied to the S&P 500 index with a call after one year and so did HSBC last month.

To facilitate the pricing of a single underlier over a short duration, the participation rate on the upside may vary. In some cases, issuers have cut it to 100%.

Outperformance

“I kind of like it,” said Steve Doucette, financial adviser at Proctor Financial.

“We know there will be a pullback at some point. But you get that 15% buffer level. Three years from now, you have a 15% downside protection and 1.25 times leverage with no cap.

“That means you outperform in either direction if you’re not called.”

The call after one year was not a bad outcome especially in a moderately rising market.

“If you’re called, you get 8.5%. You might give up some return on the index, but it’s still a decent return.

“Meanwhile you’re levered up on the third year.”

Time to grow

In past structures with two-year tenors, investors only had one year between the call and the maturity date.

The worst-of payout in this deal presumably allowed the issuer to provide more time for growth during the last two years, an advantage considering that both indexes must finish positive and that, after one year, at least one of them was not.

“With leverage you want to have enough growth to give you a significant return,” he said.

“Being up 1% and getting 1.25% is pointless.

“So, the question is: are two years enough time to get both indices higher in a meaningful way?”

No one could answer the question, he said.

“You never know which direction the market is moving. But at least, you have two opportunities of getting a decent return.”

Slight modifications

“I kind of like the parameters of this note.”

If he decided to modify the structure, Doucette said he may lower the buffer in order to increase the call premium.

“I may put a 10% buffer for a 10% coupon,” he said.

This would secure a higher gain in the likely event of a call.

Doucette said he tends to be optimistic regarding the leverage scenario at maturity.

“I can see a correction at some point.

“But three years out hopefully we’re beyond Covid, we’re beyond the supply issues moving into global economic growth, which will move the indices forward.,” he said.

Not cheap

One less appealing aspect of the deal was its cost.

The notes carry a 2.85% fee, according to the prospectus, or 95 basis points per annum.

“It’s probably the fee on the brokerage platform. A fee-based compensation can do much better than that to lower the cost and improve the terms.

Matt Medeiros, president and chief executive of the Institute for Wealth Management, agreed.

“The fee is definitely higher than what we want,” he said.

“It’s about two to three times more expensive than what we’ve previously looked at.”

Flattish

But Medeiros said he liked the terms of the deal despite its high fee.

“I like the three-year term,” he said.

If I was called after the first year, I would accept that 8.5% return as fair based on our own return expectations.”

Noteholders may lose some of the upside. But the notes are not designed for bullish investors.

“If you expect a 20% growth on one year, that wouldn’t cut it obviously,” he said.

“But I would be OK with 8.5%.”

Bullish

However, bulls get a chance to outperform the market if the call fails to occur.

“I do like the return enhancement with 1.25 times leverage if you hold it to maturity,” he said.

“It’s also nice that there is no cap especially when you already have some leverage.

“The buffer is OK. It’s not great, but it’s OK.”

While investors do not control the performance of the underliers nor the payout of the notes, they do get a chance to express two different views at different periods, he said.

“Over the short-term, the notes are a good way to express a range bound or slightly bullish view. After that, the investment turns purely bullish. With the leverage and the uncapped exposure, you want as much index growth as possible.”

The uncertain duration of the product was not seen as a drawback.

“This note can be a one-year, or it can be three-year. I like the outcome after one year. I also like the three-year term with the no cap, the leverage and the buffer. I much prefer a three-year than a short-term maturity for that kind of payout,” he said.

Barclays is the agent.

The notes priced on Oct. 13 and will settle on Oct. 18.

The Cusip number is 06748WN33.

© 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.