Barclays’ trigger performance notes tied to Vanguard FTSE EM ETF are aimed at ‘recovery’ trade

By Emma Trincal

New York, Oct. 28 – Barclays Bank plc’s 0% trigger performance securities due Nov. 30, 2020 linked to the Vanguard FTSE Emerging Markets exchange-traded fund are designed for long-term bulls who anticipate that the current bearish slump in this asset class will take some time to revert itself, sources said.

The payout at maturity will be par of $10 plus 126% to 136% of any fund gain, with the exact participation rate to be set at pricing, according to an FWP filing with the Securities and Exchange Commission.

Investors will receive par if the fund falls by up to 25% and will be fully exposed to any losses if the fund finishes below the 75% trigger level.

Patience

“I’m pretty bullish on emerging markets long term,” said an emerging markets analyst at a sellside firm.

“Long term is better than short term in this asset class. Once the Fed stuff is out of the way, we should be all right. People will always be interested in buying emerging markets. It’s just that now is not the best time.”

The Vanguard FTSE Emerging Markets fund is down 12% this year, underperforming the S&P 500 index by more than 10 percentage points. In the last 12 months, the ETF has decreased by 16.7%.

Less used index

Another well-recognized benchmark for this asset class, the MSCI Emerging Markets index, had dropped 10.5% for the year to date and has declined by 14.35% over the past year.

Analysts said that investors are facing a tough time in this market due to the stronger dollar and collapsing oil prices, among other factors.

Notes linked to the MSCI Emerging Markets index are used much more often than those referencing the FTSE index, according to data compiled by Prospect News.

A total of $250 million of MSCI Emerging Markets index-linked notes has been brought to market so far this year in 112 deals.

In contrast, only 24 offerings based on the FTSE index have priced for a total notional of $70.5 million.

China, South Korea

Important distinctions exist between the two main emerging markets benchmarks, the prospectus said.

First, unlike MSCI, FTSE in its methodology does not include South Korea, considered a developed country. Hong Kong stocks are also excluded. Instead, the FTSE Emerging Markets index includes shares of mainland China companies, according to the prospectus.

On average, notes linked to the MSCI Emerging Markets index (or ETF) are shorter than those linked to the FTSE. Their average maturity is 2.2 years for the former and 4.5 years for the latter, according to the data.

As a result, a longer-dated note offering exposure to these markets is more unusual, a source said.

Terms

“This deal is a five-year, so it helps eliminate the cap. At the same time, you have a greater chance to hit the barrier at some point,” a structurer said.

“A lot of people are getting into emerging markets.

“It’s a volatility play. Emerging markets are cheaper. Volatility is pretty expensive.

“With that you can structure a deeper barrier.”

Repairing losses

A market participant said the notes are unusually long for this asset class. But he understands that some investors may use the notes as a so-called “repair strategy” in order to reduce losses incurred in a long-only position on the same index.

“A lot of people are sitting with ETFs or mutual funds with losses. They want to sell their positions to realize the loss. Then they move into a shorter-dated note that has some downside protection or even not but that will give them some leveraged performance on the upside. The strategy is to make it easier for you to recover your investment. It’s a fairly common thing in the options world. That’s called a recovery trade.”

Barclays and UBS Financial Services Inc. are the agents.

The notes (Cusip: 06743Q143) will price on Nov. 24 and settle on Nov. 30.

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