Barclays’ $2.1 million autocall notes tied to Russell, Euro Stoxx show innovative teaser rate

By Emma Trincal

New York, March 8 – Barclays Bank plc’s $2.1 million of 9% autocallable notes due March 4, 2027 linked to the lesser performing of the Russell 2000 index and the Euro Stoxx 50 index represent an innovative way to structure an autocallable with a longer-than-average 10-year duration and a fixed coupon during the first two years of the notes, sellsiders said.

“It’s unusual,” an industry source said.

Interest is payable quarterly through March 4, 2019, according to a 424B2 filing with the Securities and Exchange Commission.

If each index closes at or above its initial level on any quarterly call valuation date beginning Feb. 28, 2019, the notes will be automatically called at par plus a call premium equal to the coupon times the number of observation dates that have occurred to and including the call date, according to the prospectus.

If the notes are not called and the final level of the lesser-performing index is at least 50% of its initial level, the payout at maturity will be par. Otherwise, investors will lose 1% for each 1% decline of the lesser-performing index from its initial level.

Autocall

The size of the fixed rate was the eye-catching feature of the deal.

“For investors who expect the market to stay at the same levels of where it is today, at least in the first two years, the notes offer a really high coupon at least initially,” this source noted.

“It’s like an autocall, only that you get this 9% teaser rate for the first two years. It’s as if you were buying the notes at an 82% discount,” he added referring to the paid interest during the initial two-year period.

The “best scenario” for investors would be to be called after two years when the fixed interest rate payment ends.

“You get called right away with 18% for the first two years and your principal back. That’s the best outcome,” he said.

Opportunity cost

The product however carried a risk if the call never occurred since investors starting in February 2019 only get paid if the notes are called.

“You may never be called if the market goes down. You may be stuck for eight years with no coupon, no upside, only the downside,” he said.

“Who can tell for sure if in 10 years we’ll see the same levels?”

“Investors buying the notes have to believe there’s a good chance that the indexes will not drop below their current levels for a long time.”

A bear market could severely reduce the chances of an early redemption. But many are betting that bear markets are short-lived. The historical length of a bear market is 14 months on average.

“I’m only stressing the risk of this product. But that’s why people are buying this note. Not everyone agrees,” he said.

Fixed-to-floater-like

A market participant downplayed the risk of “getting nothing.” But he said that he was not sure who the target investors may be.

“It’s a very, very interesting note,” this market participant said.

“There hasn’t been anything specifically like this in equities to my knowledge.

“They’re trying to emulate this fixed-to-floating structure that’s so popular in rates...except you’re not getting any floater after that...you’re getting either something or nothing.”

The market risk was small, he stressed.

“A barrier at 50% is pretty good. You feel fairly secure in getting your principal back,” he said.

A scenario in which the notes are never called was not as bad as losing principal at maturity.

“Is it possible to get to maturity and to not get more than 18% after 10 years? Yes it’s possible, but it’s not very likely,” he said.

“Suppose it happens. You get paid for the first two years only. That’s 1.8% per annum. It’s not ideal of course, especially if rates go higher. But it’s not the end of the world.”

Possible outcomes

The probabilities of getting called were much higher, as it is the case with autocallable notes, especially early on.

“If you get called after two years with 18% in call premium, that doesn’t look too bad. It’s the best outcome and also the most likely scenario,” he said.

“You can also get called after that anywhere until maturity. It’s obviously great. But it’s hard to estimate the likelihood of this scenario because we just don’t have many long-term autocalls to compare it with.”

Autocallable notes, which only pay a call premium, had an average tenor of less than three year (2.87 year) last year, according to data compiled by Prospect News. The longest term was a six year.

“Last scenario: can you lose your principal at maturity? Yes. It’s possible but not very likely,” he said.

Premium, no contingency

Going back to his initial comparison between this note and the traditional fixed-to-floater notes, this market participant pointed to a “big difference” between the two products.

Fixed-to-floaters pay a teaser rate initially on either the first year or the first two years. After that, investors receive a floating coupon, which resets based on a spread over a specific interest rate. The structure is very popular in rising interest rate environments.

“The major difference is that you know you’re going to get something with the fixed-to-floating notes. Here you’re not sure. It depends on whether the notes get called or not,” he said.

Target

Reflecting on that, he concluded that one of the product’s weaknesses may be to try and accommodate different categories of investors with distinct needs.

“It’s unclear who the end-investor is. Traditionally, income investors look for structures that pay a coupon through the term, even a contingent coupon. That wouldn’t be that.

“Autocallable people don’t necessarily need the income. They’re happy if it gets called with a redemption premium.

“Here you try to do both,” he said.

“It’s not necessarily a perfect fit for one type of client or another, but there’s definitely something interesting about it.

“Maybe it solves certain specific needs. Maybe it offers a solution to some issues we’re not seeing.”

Barclays is the agent.

The notes (Cusip: 06741VLJ9) priced on Feb. 28.

The fee was 3.35%.

© 2015 Prospect News.
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