Advisers compare exposure and protection in two Barclays’ leveraged uncapped notes on indexes

By Emma Trincal

New York, Oct. 5 – The issue of getting uncapped leveraged return in a reasonable timeframe often comes up on conversations between advisers and investors as fewer of such deals have been spotted. Those structures have been difficult to price and investors not always willing to accept the required trade-off.

Buysiders looked at two similar notes both levered and uncapped comparing the exposure and the nature of downside protection being offered.

One of those notes, which already priced, is Barclays Bank plc’s $1.6 million of buffered SuperTrack notes due Sept. 30, 2025 linked to the S&P 500 index and the Dow Jones industrial average, according to a 424B2 filing with the Securities and Exchange Commission.

The payout at maturity will be par plus 1.15 times any gain in the lesser performing index.

Investors will receive par if the lesser performing index finishes flat or falls by 15% or less.

Otherwise, investors will lose 1% for each 1% decline of the lesser performing index beyond 15%.

The second issue – Barclays’ SuperTrack notes due Oct. 28, 2025 linked to the S&P 500 index – is set to price toward the end of the month.

The payout at maturity will be par plus 1.2 times any index gain.

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

Worst-of versus single asset

“This is a very interesting comparison,” said Michael Kalscheur, financial adviser at Castle Wealth Advisors.

“Granted, it’s not apples to apples since one has already priced and the other has not. The market moves all the time.

“However, they’re similar enough to make the comparison interesting.

“Do you want a 25% barrier on a single index or a 15% buffer on a worst-of?

“This is a fascinating question.

“Part of it is going to come down to the client – what they want, their expectation, what are they going to be happy with.

“But another part comes down to statistics.”

Back-testing

Looking at statistical series of returns for the S&P 500 index going back to 1950, Kalscheur found that on any given five-year period, the index was negative 17.5% of the time.

Within this bucket, it was down more than 15% only 5% of the time. As a result, the probability to be within the fully protected buffer zone (decline in the index of less than 15%) is 12.5%.

Looking at the barrier threshold, he found that the index dropped more than 25% only 0.8% of the time.

As a result, the chances of losing the full buffer protection beyond a 15% decline while still maintaining protection via the barrier would represent a small percentage of 4.2%, he noted.

Even smaller, the chance of breaching the barrier would only be 0.8%.

Valuable barrier

“It just doesn’t happen very often. I like this barrier. Not only do I get a little bit more leverage than the other, I also have exposure to the S&P only and not the Dow Jones.

“Tech may revert to the mean and the S&P, which is tech-heavy, could go through a correction. But over a five-year period, I’m more comfortable with the S&P alone than with a worst-of, especially if that involves the Dow, a much more concentrated index.

“I like both notes based on Barclays, which is a good credit. I like the five-year term, the leverage, the no-cap on both.

“But I like the second one better.

“The 25% protection, even if it’s a barrier, gives you significantly more than 15%, especially given the fact that you have to give up dividends.

“And the exposure to the S&P is significantly less risky than a worst-of.”

“I love the contrast between those two notes.”

Welcome back

Carl Kunhardt, wealth adviser at Quest Capital Management, said he was happily surprised to see uncapped leveraged notes.

“I haven’t seen these in weeks, if not in months,” he said.

He used to see five-year uncapped leveraged notes on indexes, first with single underlying, then as worst-of. But lately it has been rare to see any of such payouts.

Some issuers recently introduced uncapped leveraged exposure on shorter-dated notes, but the structure includes one or two automatic calls before maturity, a way to cheapen the cost of leverage.

“I’m glad we’re seeing these plain-vanilla deals again, especially without caps,” he said.

Client’s profile

Asked which of the two deals he preferred, Kunhardt said:

“I would probably do the buffer because I am always biased toward buffers.

“On the other hand, I don’t like worst-of. But in this case, the S&P being more volatile, I think your worst-of is actually going to be tied to the S&P as well. So those two are almost the same note.

“The difference in leverage is a distinction which doesn’t mean much...1.15 versus 1.2. I’m not sure it matters.

“So, it really boils down to how much you care about having a buffer and how much you dislike the worst-of.”

As a financial adviser, Kunhardt said that the answer to this question will depend on the clients.

“If you have a conservative investor, you probably should go with the buffer. An aggressive client would go with the barrier,” he said.

Barclays is the agent for the worst-of buffered notes.

The notes settled on Oct. 5.

The Cusip number is 06747QGP6.

The fee is 1.125%.

Barclays is also the agent for the upcoming notes.

The notes will price on Oct. 23 and settle on Oct. 28.

The Cusip number is 06747QM20.

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