Barclays’ barrier autocalls linked to the S&P 500 show mixed structure driving varied opinions

By Emma Trincal

New York, Aug. 17 – Barclays Bank plc’s 0% barrier autocallable notes due Aug.19, 2027 linked to the S&P 500 index can reward investors with income or growth, which led advisers to express different opinions about the payout based on their own goals and what they expect to be the most likely scenario.

The notes will be called at par plus a 12.5% redemption premium if the index closes at or above its initial level on Aug. 17, 2023, according to a 424B2 filing with the Securities and Exchange Commission.

If the notes are not called, the payout at maturity will be par plus two times the index return if the index finishes at or above its initial level.

If the index declines by up to 30%, the payout will be par; otherwise, investors will be fully exposed to the decline of the index from its initial level.

No real income

Mark Dueholm, chief fixed-income trader at Landolt Securities, said the notes would not meet his clients’ needs as his firm’s focus is on income generation.

“I can see the appeal of this note. But typically, our clients want income, and this is not an income product. If you’re not called, you have no interest payments for five years,” he said.

The 12.5% call premium, he added, is attractive.

“But the reason they can price it, is that you may not get called. And if you don’t get called, you have to hold the notes for a long time without any income,” he said.

The payout is triggered at the initial price like a snowball, he said, which partly explains the double-digit premium.

“Snowballs like this note pay call premiums that are higher than contingent coupons because you’re less likely to be paid above initial level than you are above a barrier,” he said.

But there was an important difference between the two products.

“Personally, I would prefer a snowball because they’re a real source of income with a more reliable income stream,” he said.

“You have several opportunities to get called and you can cumulate the premium, so you can catch up. With this one, it’s the exact opposite. You only have one call and one call premium with no more opportunity to earn anything until maturity if you don’t get called.

“So, the bigger risk here is to be stuck without income for five years.”

Bullish take

A financial adviser at the contrary was attracted by the leveraged uncapped return at maturity, seeking growth for his clients. But he concluded that such outcome was unlikely.

“Who wouldn’t want 2x leverage with no cap? Unfortunately, chances are you’ll get called after one year.”

He acknowledged that the 12.5% call premium was “attractive.” But given current market conditions, the payout in five years would probably be more rewarding, at least for bulls, than the call premium after one year.

“The market hasn’t fully recovered from the pullback we had during the first half of the year. We’re still down from the start of the year when the market peaked. The odds are high that within five years, the S&P will benefit from a robust recovery,” he said.

This adviser was even bullish short-term, which is why he foresaw the call in one year. “Clients are more excited about the 2x leveraged participation in a bull market. They’re likely to be disappointed,” he said.

“The only way you participate is if you don’t get called. Since it’s probably not going to happen, I find the note a little bit tricky. You have to do some explaining to the client and manage expectations. If you want to participate in a robust performance, chances are you won’t get what you are looking for.”

Good either way

A market participant was more upbeat about the notes.

“It’s a pretty attractive structure either way. You get called, you collect 12.5%, which is very competitive. You don’t get called, the note offers compelling economics with 2x leverage, no cap and a 70% knock-in put,” he said.

He said he saw several variations on the same structure.

“I’ve seen 8% to 10% after one year as the call premium with one-to-one at maturity and full principal-protection.”

For this market participant, the call after one year was not a bad outcome. But it may not be the preferred one for bullish investors.

“It’s true that the call cheapens the pricing making the return at maturity very attractive.

“You’re also taking the credit risk of Barclays for five years and you’re doing so in a rising interest rates environment.

“So, there are many reasons why the terms at the end are so compelling. But who’s going to complain about getting 12.5% in one year?” he said.

Barclays is the agent.

The notes were expected to price on Aug. 16 and to settle on Aug. 19.

The Cusip number is 06748XNK3.

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