Barclays’ 10%-11% autocallables linked to three oil stocks: call is more likely than losses

By Emma Trincal

New York, Dec. 12 – Barclays Bank plc’s autocallable notes due Dec. 31, 2018 linked to the least performing of the common stocks of ConocoPhillips, Chevron Corp. and Marathon Oil Corp. offer an elevated but probably short-lived income stream as the notes are likely to be redeemed early, advisers said.

The notes will pay a monthly coupon at an annualized rate of 10% to 11% with the exact rate to be set at pricing, according to a 424B2 filing with the Securities and Exchange Commission.

The notes will be called at par if each stock closes at or above its initial level on any quarterly call valuation date.

The payout at maturity will be par unless any stock finishes below its barrier price, 50% of the initial price, in which case investors will lose 1% for each 1% decline of the least-performing stock.

Carl Kunhardt, wealth adviser at Quest Capital Management, said he would not offer the notes to his clients as he avoids sector bets.

“But for aggressive growth accounts and for my own account, I would consider it,” he said.

The oil sector is “very volatile” and the oil companies “unpredictable,” he said.

“But I would consider it for my own money, for a number of reasons,” he said.

Crude up

His first reason is his bullishness on oil.

“I think that with this new administration and the unified Congress, some of the restrictions on drilling and the ban on U.S. oil exports will be lifted. It can only benefit those stocks.”

U.S. crude futures rose to nearly $53 a barrel on Monday after non-OPEC countries, including Russia, agreed to cut production.

The share prices of the three underlying stocks closed higher while the S&P 500 index was down 0.11%. Marathon gained 1.35%, ConocoPhillips, 1.20% and Marathon Oil, 1.15%.

Raymond James

“My second reason is that two of those stocks, Chevron and Conoco, are highly rated by Raymond James. Any time an analyst at Raymond James has a bullish outlook on a stock, you ought to consider it,” he added.

Quest Capital Management is affiliated with Raymond James. Kunhardt said he is a big believer in the firm’s equity research.

Finally, he pointed to the structure of the product itself.

“It’s a very attractive income stream, especially in this low interest rate environment, and it’s guaranteed,” he said.

“And on the downside, 50% is a long way to drop.

Kunhardt said he is less familiar with Marathon than with the two others names but that all three are correlated. “If none of them breach the barrier, I get my principal back and I would have received the coupon all along,” he said.

Early redemption

The less attractive feature of the note is the autocall since it might reduce the amount of income investors may get.

“The biggest risk here is the term,” he said.

“The number one attractive thing in this that immediately captures somebody’s attention is the 11% yield. If I get called after three months, I get 2.5% and change.

“Where in the world are you going to get another 11% yield in the fixed-income market three months from now?

“I wouldn’t want to be called, but unfortunately, chances are that I will.”

Worst of

Kirk Chisholm, wealth manager and principal at Innovative Advisory Group, said that he usually does not like worst-of payouts because of their complexity and unpredictability.

“When you look at three different positions, it’s very hard to predict,” he said.

On the other hand, the structure offers an attractive downside.

“The 50% barrier is good. It’s a strong barrier,” he said.

If he had to guess what would be the worst-performing stock, he would pick Marathon Oil from a technical perspective.

“I wouldn’t expect the two others to break the barrier,” he said.

Put sale

Looking at a put on Marathon with a January 2019 expiration date – “the closest approximation I can find” – he said that the issuer’s pricing appears to be based on Marathon rather than on the two other stocks.

“The others are not even close. If I wrote an out-of-the money put on Marathon for that length, I’d have a better probability of success than with the notes,” he said.

If the investor is long the stock while short the put (cash-settled put sale), he would not lose the potential appreciation of the stock, he said.

The limited upside of the notes combined with the high probability of being called early make the notes less attractive to him than the short put trade.

“The put would give me more protection on the downside and more potential on the upside. It would also be more liquid.”

Barclays is the agent.

The notes will price Dec. 27 and settle on Dec. 30.

The Cusip number is 06741VEM0.

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