Barclays’ $4.43 million callable contingent coupon notes on Ford, Tesla, GM offer high reward

By Emma Trincal

New York, Aug. 3 – Barclays Bank plc’s $4.43 million of callable contingent coupon notes due July 25, 2024 linked to the performance of Ford Motor Co., General Motors Co. and Tesla, Inc., pay a high coupon for a reason, advisers said, as they examined the risk associated with the high return.

The notes pay a contingent monthly coupon at an annualized rate of 26% if each stock closes at or above its coupon barrier level, 70% of its initial level, on the related observation date, according to a 424B2 filing with the Securities and Exchange Commission.

The notes will be callable in whole at par plus any coupon due on any monthly call date after three months.

If the notes are not redeemed early, the payout at maturity will be par plus the final coupon unless any stock finishes below its coupon barrier.

If any stock falls below the coupon barrier but all finish at or above the 50% final barrier level, the payout at maturity will be par. Otherwise, investors will be fully exposed to the decline of the least performing stock from its initial level.

Discretionary call

Donald McCoy, financial adviser at Planners Financial Services, said he would not be buying the notes in large part because of the issuer call but also because of the risky underlying assets.

“You’re getting this crazy high yield each month when the three stocks stay above the 70% mark,” he said.

“However, Barclays is unlikely to pay 26% a year for very long.

“So, if things go well, you can assume that it’s going to be called. It’s going to be a very short-term play.”

Call risk

Any early call raised the issue of reinvestment risk.

“When you’re trying to invest people’s money for the long haul, it may be a little bit disappointing to be called in three months,” he said.

A call on the first call date would generate a 6.5% return for the three-month holding period. Yet, the outcome would not be in line with this adviser’s process.

“When you’re doing all this work of finding income for your clients and three months later, you’re back to doing it all over again for another product, I can’t see using this as a particularly suitable investment,” he said.

“I can’t really see myself telling a client to invest in this and to see them called away on a whim.”

An automatic call would be a better choice, he said.

“When the issuer can call it whenever they want and for any reason, you have no way to plan for it,” he said.

The Tesla card

The volatility of the underlying stocks was also an issue. After all, the coupon itself is at risk, he said.

“You can easily imagine any of those stocks dropping 30% along the way, and therefore, you’re not getting paid and that could go on for a number of months.”

Tesla, which closed at $709.74 on Tuesday has dropped more than 21% from its $900 high of January. But if the stock was to retest its $273 low of a year ago, the move would represent a price drop of 61.5%.

Tesla is the most volatile of the three stocks, he said.

Ford has rallied this year, gaining 59.5% while General Motors rose 39%.

“All three stocks are richly valued. But Tesla could incur a significant drop. Its valuation is off the chart.”

The price-per-earnings ratios of Ford and General Motors are 16.48 and 9.22 respectively. But Tesla shows a whopping 371 P/E.

“Tesla is more than a car stock. GM and Ford are more likely to move in sync,” he said.

“When you think that less than two years ago Tesla was trading at $50, it could easily drop, and you can lose quite a lot of income.”

And not just income, he added.

“The problem I have with this note is that just to get a couple of good months you’re exposing yourself to a significant amount of risk. You’re not guaranteed the income if one of the stocks tanks. More importantly, you may not get your money back at the end.”

A low barrier means dramatic losses if there is a breach at maturity.

“If you’re down 51%, you lose 51%.

“That’s a significant risk for a yield play. People have to be aware of that.”

Huge coupon

Tom Balcom, founder of 1650 Wealth Management, said he liked the notes for a speculative play although he would not recommend it to his clients.

“26% is a huge yield and the 30% coupon barrier is pretty healthy,” he said.

The issuer call added uncertainty to the investment since the notes can be called any month after three months.

“It’s an issuer call. It’s not as predictable as an autocall. But that’s one of the factors behind this huge premium,” he said.

Barrier, allocation

Balcom said he could see the notes in two ways – as a bet on Tesla or as a yield play.

“Tesla is probably where the risk is because of its valuation,” he said.

“At the same time, 50% at maturity is a huge barrier.

“Even with Tesla in the mix, the probability of breaching that threshold at maturity is pretty low, I think.

“This is a very solid protection on a point-to-point basis on a three-year.”

Despite the positive terms he underlined, Balcom said he would not show the notes to his clients because he does not invest in individual stocks.

“We only do indices even though we know we could never get a 26% coupon on indices.”

If he was buying the notes, Balcom would be mindful on how to allocate the product in the portfolio.

“I would put it in a high-yield bucket. I would be cautious about the risk. This is not something you want to use as a fixed-income substitute.”

Barclays is the agent.

The notes settled on July 27.

The Cusip number is 06748W5P4

The fee is 0.75%.

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