Barclays’ phoenix autocall notes tied to finance stocks show worst-of with double-digit coupon

By Emma Trincal

New York, Aug. 15 – Barclays Bank plc’s phoenix autocallable notes due Aug. 20, 2020 linked to the least performing of the common stocks of Bank of America Corp., JPMorgan Chase & Co. and Wells Fargo & Co. offer a double-digit contingent return for investors relatively bullish on U.S. banks and willing to get exposure to single-stocks with a relatively high correlation.

Each quarter, the notes will pay a contingent coupon at a rate of 10% per year if each stock closes at or above its barrier price, 70% of its initial share price, on the related quarterly observation date, according to a 424B2 filing with the Securities and Exchange Commission.

Beginning Feb. 15, 2018, the notes will be automatically called at par if each stock closes at or above its initial share price on any quarterly determination date.

The payout at maturity will be par unless any stock finishes below its barrier level, in which case investors will lose 1% for each 1% decline of the worst-performing stock.

News priced in

Jerry Verseput, president of Veripax Financial Management, said he was comfortable with the risk-adjusted return of the notes from a glance at the charts of the three respective bank stocks.

“Obviously Wells Fargo is having a tougher time than the other two just because of their negative publicity. But from a technical standpoint, all three stocks seem pretty unlikely to breach [the 30% threshold,]” he said.

Technical scan

JPMorgan, currently trading at $93.00 a share, would have to drop to $65 to disable the downside protection.

“The stock would have to go back to its 2016 levels, which is pretty safe. Same thing for Bank of America,” he said.

JPMorgan traded at $65.00 about a year ago. Bank of America, which closed at $24.50 on Tuesday, would drop to the downside trigger level if its price dropped to $17.00, which occurred just prior to the November presidential elections.

“The banks really took off in November of 2016. That’s when they popped up for a few months...But they have been roughly flat since then,” he noted.

Long-term resistance

“That gives you healthy boundaries. You’re going to run into resistance before you hit 30% down,” he said.

He observed the same chart pattern for Wells Fargo.

The stock closed at $53.00 a share on Tuesday. Its barrier-equivalent price would be $37.00.

“Wells Fargo is the weakest out of the three. But it already got a lot of bad news out of the way,” he said.

“I don’t see the stock falling to $37.00. There is already a long-term resistance level at $43.00.”

Wells Fargo’s share price last hit the $37.00 level four years ago.

“From a technical standpoint, these three are going to be pretty representative of the U.S. banking sector,” he said.

Verseput added that the potential reforms and regulatory cuts should help bank stocks in general.

The contingent coupon was attractive in relation to the risks he analyzed on the chart.

“For 10% that’s not a bad tradeoff,” he said.

“And it’s autocallable.”

Calling

A common criticism against autocallables, he noted, is that such products get called early, which they do when a call occurs, as demonstrated by statistics.

“This one at least gives you a six-month no-call so you should get half of the coupon,” he said.

“Nobody should be disappointed to make 5% in six months.”

Verseput has no concern about call risk. To him, the real issue with an early call is cost.

Autocallable notes are not designed to be held until maturity, he said.

One of his strategies is to negotiate upfront a discount price with the issuer.

“I like autocallables and I usually buy them at a slight discount,” he said.

“It’s a little bit of a bonus. It gives me a little bit of protection if the notes are called early.”

Not a fan

Steven Foldes, vice-chairman at Evensky & Katz / Foldes Financial Wealth Management, said he did not like the notes partly because of the structure.

The downside risk was a concern.

“I don’t love worst-of, especially linked to single stocks. They can be very volatile and as such, you’re able to breach the barrier,” he said.

“And then you’re making 2.5% a quarter. That’s not a lot. We’ve seen how those stocks reacted to the financial crisis of ’08.”

The 2.3% fee disclosed in the prospectus was also “too high” for his firm, he said.

The contingent coupon level, along with the barrier and the fact that the underliers were single stocks led him to say that the risk-adjusted return was not to his liking.

“If you love these stocks then buy them,” he said.

“The downside, I think, is quite risky. It’s a worst-of with three single stocks. It can breach.

“If the stock goes up, you lose.

“It seems to me that it’s the reverse of a win-win...Almost like a lose-lose.”

Barclays is the agent.

The notes will settle on Friday.

The Cusip number is 06744CGU9.

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