Barclays’ $1.88 million autocall on SPDR S&P Oil & Gas show high coupon, but sector is risky

By Emma Trincal

New York, March 15 – Barclays Bank plc’s $1.88 million of phoenix autocallable notes due March 14, 2023 linked to the SPDR S&P Oil & Gas Exploration & Production exchange-traded fund feature a double-digit contingent coupon based on one underlying, an advantage for investors reluctant to use worst-of as a source of premium. However, the volatility of the underlying whose performance is correlated to oil prices has advisers wonder whether the downside protection is enough.

The notes will pay a contingent quarterly coupon at an annual rate of 13.75% if the ETF closes at or above its 85% coupon barrier on the observation date for that period, according to a 424B2 filing with the Securities and Exchange Commission.

The notes will be called at par plus the contingent coupon if the ETF closes at or above its initial price on any observation date beginning with the fourth observation date.

The payout at maturity will be par unless the ETF finishes below its 66% barrier price, in which case investors will be fully exposed to any losses.

Barrier

“I haven’t seen that type of coupon in a while. But I’m not crazy about the downside risk in this sector,” said Steve Doucette, financial adviser at Proctor Financial.

“It seems like five years out you should never be worried about a 34% drop. But you never know. This is the oil sector. We could go down again and never come back or not come back high enough.”

Contingent coupon

The 13.75% annual contingent coupon is attractive, he said, especially with a one-year no-call period. But investors are likely to either get called early or skip a number of payments.

“Ideally, you want to collect your coupon as long as possible. If the market runs, you get your 3.5% every quarter except that it can’t last very long because you’ll get called,” he said.

On the other hand, investors are “locked up for five years” without any guaranteed coupon.

“You could be collecting no coupon at all. After all, 15% down is tight. It’s unlikely except if the worst hasn’t come yet. Once the bear market is there you’re not going to get paid for a while,” he said.

Sector risks

Investing in the energy sector represents risks associated with the volatility of oil prices, he added.

While oil has recovered from its 2015-16 bear market, prices fluctuate based on supply and demand.

Supply has been problematic with U.S. shale production soaring. On the demand side, renewable energy may offer an alternative to U.S. consumers within the next five years.

“This is an industry that might become obsolete with new technologies. If the barrier is hit, you’re long the index. I wouldn’t put it beyond the realm of possibilities that this could end below 34%.”

Risk reward

Autocallables cap the upside while subjecting investors to unlimited downside if the barrier breaches, he added.

“I wouldn’t go with an autocall in a sector that can be down a lot. It may never happen. But again, you’re taking a lot of risk for a limited upside,” he said.

Matt Medeiros, president and chief executive officer of the Institute for Wealth Management, said he believed the deal was a reverse inquiry.

“It looks like this particular note was designed for a specific investor. It’s a bespoke deal apparently given the size,” he said.

“I like the sector but I don’t like all the terms and conditions associated with this note.”

Medeiros in general said he is not very keen on autocallable structures because the duration is a wildcard making the risk harder to manage.

“You have to examine the details to know when it might be called,” he said.

One positive feature of the product was the size of the coupon.

“13.75% per annum. That’s reasonable actually. I’m not too worried about losing an opportunity,” he said.

But the downside was a drawback.

“I’m not a fan of barriers. I’m optimistic on the asset class; but, having said that, I would prefer a buffer versus a barrier.”

Barclays is the agent.

The notes settled on Wednesday.

The Cusip is 06744CZS3.

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