Barclays’ CDs linked to Euro Stoxx 50 have appeal due to uncapped upside, full protection

By Emma Trincal

New York, June 9 – Buysiders said that Barclays Bank Delaware’s 0% certificates of deposit due June 24, 2021 linked to the Euro Stoxx 50 index are very attractive due to the absence of a cap on the upside. They do not object to the longer-dated structure given the benefits of downside protection, FDIC insurance and exposure to the European equity benchmark with unlimited return potential.

If the index return is greater than zero, the payout at maturity will be par plus the index return, according to a term sheet.

If the index return is less than or equal to zero, the payout will be par.

The CDs are covered by FDIC insurance under the legal limit of $250,000 per depositor.

No cap

“I like it,” said Carl Kunhardt, wealth adviser at Quest Capital Management.

“I like it all the way around: protection on the downside, opportunity on the upside and the no-cap, which addresses one of the main problems with market-linked CDs.”

Kunhardt said he learned about structured products with market-linked CDs.

“When I started buying structured products, I started with CDs because of the principal protection. I bought a couple of three-year [CDs]. That’s how I got my feet wet on structured notes,” he said.

“What I like about a CD obviously is the principal protection, which takes care of market risk. But the beauty of market-linked CDs is also that they give you the opportunity to get some upside from the equity. Unfortunately, the biggest shortcoming of most market-linked CDs is that they’re capped relatively low.

“Reading the terms of this CD – Barclays, seven-year, the Euro Stoxx, principal protection, FDIC insurance – I would have expected to see a 7.5% to 8% cap per year or something like that. But this one has no cap, which is amazing.”

Kunhardt said he usually “sees” three to five CD offerings from Raymond James, which his firm is affiliated with.

“There are a few uncapped CDs but not that many,” he said.

“Among the CDs I’ve seen this month for instance, there is a 7½-year Goldman Sachs tied to the Dow Jones industrial [average], one-to-one with a 62% to 68% cap. Some are better than others. For instance, I have this other Goldman Sachs tied to the Euro Stoxx, 7½-year with 120% to 130% participation, and it’s not showing any cap. This one I guess is good too.

“But overall, the majority of those CDs are capped. So this one is pretty good.”

Seven-year term

Kunhardt does not consider the long maturity as a negative.

The lack of liquidity of CDs may be a drawback for investors. The CDs are intended to be held to maturity, according to the term sheet.

But Kunhardt said it is acceptable given the low risk profile of the investment.

“I don’t mind the seven-year; I like the principal protection; I like the FDIC insurance, which protects me against credit risk up to the FDIC limit. Barclays is a creditworthy issuer anyway, so I’m not concerned with credit risk exposure during that seven-year timeframe,” he said.

In addition, some portfolios require long-term holdings.

“Having a seven-year term is not really a problem if your outlook on the Euro Stoxx is bullish,” he said.

The risk of course is to be locked in during that time and finish with nothing since it’s a zero-coupon issue based on the final index return, he noted.

“But you take that risk. No matter what happens in the next seven years, I’m going to have some international equity exposure, which includes exposure to European stocks. So why not using something like that? If I can use a CD like that to do my international equity investing in a strategy that gives me downside protection, I think it’s pretty attractive,” he said.

Scott Cramer, president of Cramer & Rauchegger, Inc., said the uncapped upside is unusual.

“I’m very surprised to see this CD without a cap,” he said.

“I’m not surprised by the seven-year term. Everything is long term these days with CDs just because of the cost of options and where interest rates are.

“The real surprise here is not to see any sort of cap.

“Almost all CDs I’ve looked at had a cap. Even those with a one-to-one upside, like this one, tend to be capped. An uncapped CD is unusual.”

Mild bulls

The no-cap aspect of the deal should appeal to bulls or even strong bulls. But the long maturity makes mildly bullish investors the most likely to show an interest in the CDs, he said.

“This is for somebody who is moderately bullish on the Euro Stoxx over seven years,” he said.

“You tend to be less bullish with extended maturities. The more vision you lose, the further you go. It’s also for a particular portion of the portfolio where you don’t need the liquidity. You think the index will be higher, and you are willing to commit your money to a long-term holding.

“I happen to think the Euro will be up over time, and I am bullish on this asset class.”

Cramer noted that the cost of the structure is relatively standard.

The CDs carry a fee that is expected to be 3.5% or less.

“It’s 3.5%, so if you invest $100,000, you have $96,500 that goes to work for you. It’s very normal. The 3.5% fee is fair for what you’re getting.”

Barclays is the agent. Incapital LLC is distributor.

The CDs will price June 24 and settle June 30.

The Cusip number is 06740AT41.

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