Advisers want leverage boost with Barclays’ $1.5 million trigger PLUS on MSCI EM index

By Emma Trincal

New York, July 6 – Barclays Bank plc’s $1.5 million of 0% trigger PLUS due July 6, 2028 linked to the MSCI Emerging Markets index offer the advantage of uncapped upside leveraged exposure. But the five-year tenor and the fee raise some objections on the part of advisers, who would be willing to modify or sacrifice the downside protection for more leverage.

If the index return is positive, the payout at maturity will be par plus 141% of the index return.

Investors will receive par if the index return is negative but ends at or above the 75% trigger and will lose 1% for every 1% decline if it ends below the trigger level.

Creditworthiness

“It’s interesting but I don’t like the five-year term,” said Steven Foldes, wealth manager and founder of Evensky & Katz / Foldes Financial Wealth Management.

Foldes said the first thing he does when assessing a note is to look at the issuer’s creditworthiness. Long tenors contribute to adding credit risk exposure. But the bank’s five-year credit default swap rate offers a good indicator of an issuer’s credit quality.

Barclays’ CDS rates are at 118 basis points, according to S&P Global Market Intelligence.

“They have a weaker credit than the major U.S. banks,” he said.

CDS spreads for the top U.S. banks are indeed much tighter, ranging from 61 bps for JPMorgan to 90 bps for Bank of America, according to the same rating company.

“In the U.S., we have some sort of assurance that big banks won’t default because they’re ‘too-big-to-fail.’ I don’t know if you can make this assumption with a non-U.S. bank.

Another downside was the 3.5% fee consisting of a 3% commission and a 0.5% structuring fee.

“The cost is a little bit high for selling something like this,” he said, referring to the plain-vanilla structure.

Finally, another negative associated with the long tenor was the non-payment of dividends over a five-year period, he noted.

The MSCI Emerging Markets index pays a 2.30% dividend yield.

“Over the term, it’s more than 11% that you’re giving up. That’s a substantial amount,” he said.

Bargain

But the underlying ETF offered an opportunity for unlimited growth, which represented the strength of the investment.

“This is an asset class that has been pretty depressed for a while. If emerging markets bounce back, you’ll be in a pretty good position,” he said.

“From a valuation perspective, emerging markets are cheap relative to Europe and to the U.S.”

The price-per-earnings ratio of the MSCI Emerging Markets index is 11.60 compared to 23.40 for the S&P 500 index and 13.50 for the Euro Stoxx 50 index.

Unlike U.S. equity benchmarks, the MSCI Emerging Markets index is trading at a deep discount from its former highs, he noted.

The deal priced with the underlying index closing at 989.48, setting the initial price for noteholder 31.5% off the 1,444.93 peak in February 2021.

“It’s down almost a third from its high. As a value investor, you always want to buy something at a discount and you definitely get value with this asset class,” he said.

“Having said that, the non-starter for us is the five-year term. We wouldn’t want to be committed to that long.”

Boosting the leverage

The uncapped leverage was “nice,” but Foldes said he was hoping for more growth potential.

“I would try and increase the leverage by eliminating the barrier because over a five-year period, you would expect the index to be up given where it is now. A barrier would be unnecessary. Giving it up altogether for more leverage seems like a more reasonable tradeoff to me.”

Even over a two- or three-year tenor, this adviser said he would be willing to abandon the barrier for more upside leverage given how deeply discounted the underlying asset class is.

“We’re at a decent level right now. I expect some reversion to the mean. Having a barrier would not be necessary for me,” he said.

The amount of additional leverage he could obtain would depend on the negotiation with the issuer.

“It will also be a function of the term. The longer the term, the more dividends you have to play with, the more room you get to price the leverage,” he said.

Buffer

Steve Doucette, financial adviser at Proctor Financial, was also interested in getting more leverage. But he would not entirely give up the downside protection.

“You don’t need much of a barrier going out five years. I wouldn’t need 25% but I can see myself using a 5% or 10% buffer, that way I know I can outperform in each direction,” he said.

While the protection would be reduced in percentage amount, switching from a contingent to a hard protection would be expensive, however.

“The buffer might cost you more in leverage than it may give you. This is what needs to be discussed with the bank. You have to ask them the question: does the buffer increase or decrease the leverage?”

Term, fee

Doucette also preferred shorter maturities.

“We like to see three years, four years at the most. Five years is a long time especially with emerging markets that can go up and down in very short cycles,” he said.

But shortening the tenor would not be Doucette’s priority.

“We can always sell the note before it matures. Nothing forces us to hold it to maturity if the trade is going well.”

Doucette considers the 3.5% fee to be relatively high.

“I mean 70 bps a year, that doesn’t look too bad. But still. If I take out the fee, what would I get?”

“I bet I could get more leverage by lowering the fee. It’s worth asking the issuer: if I take that fee out, how much leverage can you give me?”

Barclays Capital Inc. is the agent. Morgan Stanley Wealth Management is handling distribution.

The notes settled on Thursday.

The Cusip number is 06745MJU3.

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