Barclays’ deals on international index basket to accommodate two different views

By Emma Trincal

New York, Nov. 20 – Barclays Bank plc priced two issues of notes due Nov. 16, 2028 linked to an unequally weighted basket of international equity indexes, which provided two complementary payouts based on investors’ differences in conviction, one being more bullish than the other.

The baskets have the same weighting in both deals and consist of the Euro Stoxx 50 index with a 40% weight, the Nikkei 225 index with a 25% weight, the FTSE 100 index with a 17.5% weight, the Swiss Market index with a 10% weight and the S&P/ASX 200 index with a 7.5% weight.

Two offerings

The first issue of notes, which priced for $6.86 million, will pay at maturity par plus the greater of 64% and the basket return, according to a 424B2 filing with the Securities and Exchange Commission.

If the final basket level is less than the initial basket level and greater than or equal to the 75% barrier, the payout will be par plus the absolute value of the basket return. Otherwise, investors will be fully exposed to the downside.

The other deal, Barclays Bank’s $2.63 million of 0% trigger gears, offers par plus 2.49 times any basket gain. The same 75% barrier applies but without the absolute return.

Basket

Ken Nuttall, chief investment officer at BlackDiamond Wealth Management, said he has seen the same basket used in many other notes.

“This basket recomposes the EAFE. A lot of issuers do that using slightly different weightings,” he said.

“I think the idea behind using this basket versus the MSCI EAFE index is because some of these indices are easier to hedge individually. It gives the issuer more firepower.”

Nuttall said that the two notes could be used to enhance the international bucket of a portfolio.

Complementary

“Both are good structures. International equity markets haven’t done much recently. So, getting the 64% return even if the basket is up 1% is a win,” he said.

“If it’s down, at least you make money on the downside too.”

The digital note with absolute return would be beneficial to moderately bullish or skittish investors seeking to profit from both sides of the market.

“On the other hand, if you’re more bullish, if you think international markets will go up, getting 2.5x is a pretty good deal.”

The 75% barrier was adequate for a five-year term, he said.

“If you’re down within that range, you won’t get an absolute return, but you won’t lose money either,” he said.

The determining factor for choosing one issue versus the other was the level of bullishness on the part of investors.

“I sort of like the 64% minimum for clients who want a more defined outcome. If you have a stronger conviction, if you think the EAFE is going to rebound, then the other one is the way to go,” he said.

“Personally, I would do both of these notes because they complement each other.

“I don’t think you can go wrong with either one.”

Risk budgeting

Jerry Verseput, president of Veripax Wealth Management, said he would prefer the digital one with some modifications.

“I like having the sure thing. The 64% one is a digital return with unlimited upside. That would be almost the ideal note except for the absolute return and the barrier,” he said.

“I’m not a huge fan of the absolute return. I’d rather have a deeper margin of safety.”

He explained that his choice of features was a function of his “risk budget.”

“You pay for this absolute return. But over five years and given where we are, the market is likely to be higher. So, I would rather replace the absolute return with a higher digital payout.

“When you don’t believe you’re likely to benefit from a feature, you should eliminate it and replace it with something that matters to you.

“It’s all about risk budgeting,” he said.

“Absolute return is a great marketing tool. Mr. Client, if the index is down 25% you make 25%. That sounds great. But you’re paying for it.”

Eliminating the absolute return gives investors better options, he said.

As an alternative to raising the digital return, replacing the barrier with a buffer would be another way to enhance the structure, he added.

“Getting rid of the absolute return for a 20% buffer I think would work better.”

The digital note was also a better match for this adviser based on his market view.

“I like the 64% digital because I don’t think equity returns in the next 10 years are going to be as great as what they’ve been in the past 10 years,” he said.

“It’s just my view. Now, if you have a high conviction on international stocks, if you think they’re set for a comeback after years of doing very little, obviously you’re better off with the leveraged uncapped.

“It really depends on your outlook.”

Both deals priced on Nov. 13 and settled on Nov. 16.

The fee amount common to both was 3.5%.

The Cusip number for the $6.86 million trigger absolute return notes is 06748J342.

The Cusip number for the $2.63 million trigger gears is 06748J359.

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