Advisers weigh value of one-year no-call in Barclays’s phoenix autocalls on Russell, S&P

By Emma Trincal

New York, May 9 – Barclays Bank plc’s $1.14 million of phoenix autocallable notes due May 7, 2026 linked to the least performing of the S&P 500 index and the Russell 2000 index offer a one-year no-call period, which could be either a positive or a negative depending on one’s market outlook.

The notes will pay a contingent monthly coupon at an annual rate of 9.35% if each index closes at or above its 70% coupon barrier on a related observation date, according to a 424B2 filing with the Securities and Exchange Commission.

The notes will be called at par plus the contingent coupon if each index closes at or above its initial level on any monthly call observation date after one year.

The payout at maturity will be par plus any final coupon if each index finishes at or above its 70% final barrier.

Otherwise, investors will lose 1% for each 1% decline of the worst performing index from its initial level.

Call protection

“Usually, those Phoenix autocalls are a little bit shorter, more like two-year notes. With the three-year maturity, the issuer has been able to give you a one-year no-call, which is valuable for most advisers, especially when they have many clients. They don’t have to replace the notes after three months,” said Tom Balcom, founder of 1650 Wealth Management.

For brokers, the preference may be for earlier calls.

“Some on the sellside may prefer to roll the notes sooner because it provides additional fees,” he said.

Terms, correlation

Balcom said the terms of the notes were attractive.

“Barclays had problems last year with their excess issuance. They had to offer a rescission to holders of the over-issued notes. But it looks like their pricing is competitive now,” he said.

“The 70% barrier is good. With those worst-of on U.S. equity, we typically look for a 20% protection. So having 30% is better.”

The worst-of introduced some dispersion, but the risk was moderate, according to this adviser.

“There is correlation between the S&P and the Russell. Even if one is large-cap and the other small-cap, it’s not like having the Euro Stoxx with emerging markets,” he said.

Position in the portfolio

The income-oriented product offered a yield high enough to fit in different parts of the portfolio, he added.

“When I pick a note, I always ask myself first: where do I put it in my portfolio?

“In this case, I could see the notes being used as high-yield replacement because of the downside protection. But I could also view them as equity replacement because 9.35% a year is an equity-type of return but with a lot less risk,” he said.

Balcom said he was inclined to prefer the high-yield allocation.

“If I put it in equities and the market jumps 20%, I only make 9%. That’s a bit tough to explain to a client.”

The best outcome for the equity bucket would be if the market finished flat, he noted.

On the high-yield side, the main concern would be the downside risk since high-yield securities are still fixed-income instruments despite their higher risk profile.

“It’s always a risk to put those notes in your bond allocation. But high-yield bonds have a high correlation with equities. If your notes do terrible, high-yields would do terrible too.

“You still have to keep that in mind. Volatility in the stock market is definitely the risk,” he said.

The 0.75% fee on a three-year is very reasonable, he said, commenting on the amount disclosed in the prospectus.

“As investors and advisers have embraced ETFs for decades, they’ve become much more fee-conscious. Issuers of structured notes have had to adjust,” he said.

Large-cap exposure

Steven Jon Kaplan, founder and portfolio manager of True Contrarian Investments, said he expected the exposure to be on the S&P 500 index.

“Certainly, the S&P and the Russell have a positive correlation, which doesn’t mean they’ll move exactly the same way,” he said.

“The Russell has been very weak for the past two years. The S&P began to decline in early 2022 and has bounced back since October. But the Russell has not rebounded as much.”

The S&P 500 index shows greater downside risk than the Russell 2000, he said.

“If we’re talking about risk, I would be more concerned about the S&P, which has peaked more recently and rebounded considerably from the lows.”

Since investors are getting a payout linked to the worst of the two indexes, Kaplan concluded that the exposure would in all likelihood be to the S&P 500 index.

“The main question is: will it be down more than 30%? It’s a close call. If the S&P drops and recovers within the three years, it’s not a bad outcome. But it all depends on how much it may go down. I tend to think the S&P will lose about two-thirds of its value. So, to get back to the 70% level, it may have to double. That’s a stretch.”

One-year no-call

From his bearish perspective, Kaplan found the one-year call protection to be detrimental to investors.

“As far as getting the coupon, the best outcome would be to get called after one year with your coupon.

“I don’t see it happening.

“That first year when you can’t get called would be a great feature if we were at the start of a bull market. You want to hold the notes and collect your income as long as possible in that case.

“But I don’t expect the market to be up a year from now, so in today’s market, it doesn’t actually help you. In fact, it’s likely to play against you.

“The best time to get called in this environment would have been during the first year. After that, you are directly exposed to the risk of losing a big chunk of your investment if the index finishes down more than 30% at maturity, which is quite possible,” he said.

Barclays is the agent.

The notes settled on Monday.

The Cusip number is 06745M6C7.

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