Barclays’ annual autocall tied to S&P 500, SPDR S&P Oil designed for growth more than income

By Emma Trincal

New York, April 13 – Barclays Bank plc’s 0% annual autocallable notes due April 25, 2022 linked to the least performing of the S&P 500 index and the SPDR S&P Oil & Gas Exploration & Production exchange-traded fund target investors seeking equity-like returns rather than income, said Suzi Hampson, head of research at Future Value Consultants.

She called the product a “pure autocall” as opposed to autocallable contingent coupon notes, also known as “Phoenix autocallables.” With the pure autocall play, as this product illustrates, investors only get paid when the notes are called. It is not necessarily the case with the Phoenix type when the underlying falls below par and above the coupon barrier, which triggers a payment without an early redemption, she explained.

The notes will be called at par plus an annual call premium of 12.5% if each underlying component closes at or above its initial level on any call valuation date, according to a 424B2 filing with the Securities and Exchange Commission.

If the notes are not called, the payout at maturity will be par plus 50% unless either component finishes below its 70% barrier level, in which case investors will lose 1% for each 1% decline of the worse performing component.

Pure autocall

“This structure is quite straightforward. It’s a four-year, annual autocall level at 100, both underlying having to be above that level because it’s a worst-of,” she said.

She noted that this kind of structure is “very typical” in the U.K. market where Future Value Consultants is located.

“It’s about 80% of the market here,” she said.

In the U.S., according to data compiled by Prospect News, the trend is quite the opposite. Most autocallable deals, especially worst-of, are structured to pay a coupon above a contingent barrier that is distinct and lower than the call trigger level. While those products do not guarantee interest payment, the chances of collecting the coupon over several observations through the life of the notes is high enough to allow investors to use them as income substitute, she said.

Equity-like

“If you’re an income investor and using structured products to replace some portions of your bond portfolio this note wouldn’t quite fit,” she said about the Barclays autocall.

“It’s more of an equity-like return with a 12.5% payout.”

Investors in this note should get paid better than the coupon they would get with a Phoenix autocallable. She explained why.

“First, you’re giving up the income; second, the 100 call level is higher than a contingent barrier at 70% or 75%. Therefore, you get more.”

Other factors also contribute to the double-digit return, she added.

For one, the worst-of payout lowers the chances of getting paid, she said. Therefore, this additional risk is compensated with a higher premium.

Second, the low correlation between the underlying also helps generate a higher return due to the extra risk, she said.

The coefficient of correlation between the two underlying is only 0.67.

As a comparison, the S&P 500 index and the Russell 2000 index show a coefficient closer to 0.90.

The less correlated the underlying assets are, the greater the risk.

Finally, a third factor is the higher volatility seen on the ETF, which tracks the performance of oil stocks, a sector that is already volatile, she noted.

Stress test report

The implied volatility of the SPDR S&P Oil & Gas Exploration & Production ETF at 26.9% is higher than that of the S&P 500, which is 19.5%.

“It’s a lot higher. But it can drop much more than the other index,” she said.

Future Value Consultants produces stress test reports on structured notes.

Each stress test report provides 29 tables or sections the firm’s clients may choose from.

Each report makes growth assumptions for the underlying and distributes the results across five different market scenarios, which result from the implied data used for the analysis.

The base case scenario or “neutral” assumption is the basis of the simulation in all reports. It reflects standard pricing based on the risk-free rate, dividends and volatility of the underlying.

Other scenarios are included, which are: bull, bear, less volatile and more volatile.

In the neutral scenario, the chances of the 70% barrier to breach at maturity are 27.58%, she said, commenting on one of the tables called “products specific tests.”

Product specific tests

The table displays probabilities of mutually exclusive outcomes.

The probabilities of call show different outcomes or “call point,” based on the date at which the notes get called. A call at point one is the most likely outcome with a 38.73% probability. After that the probabilities decrease as time elapses to 11.87% at point two, 6.23% at point three and 3.74% at maturity.

“As usual you’re much more likely to kick out on the first call date,” she said.

The chances of “no call,” which is the scenario in which the notes mature, are 39.43%. By definition, the worst underlying finishes negative in this case. Two things may have happened: the barrier is hit and investors lose money. This outcome has a 27.58% chance of occurring. Alternatively, in 11.85% of the time, noteholders will finish whole as the worst-of declined between the barrier level and the initial price.

Adding the call probabilities gives a 60.57% chance of getting paid, she noted.

“You have about 61% chances of getting paid versus 27% to lose money. Doesn’t sound too bad to me,” she said.

Bull scenario

The bull scenario obviously is even more favorable: investors have a more than 50% chance of getting called at the end of the first year. Overall, they are projected to be called 77% of the time. Out of the 23% probabilities of not being called investors will incur a loss only 9% of the time.

“Again we see a typical distribution: a high chance of being called on the first observation with decreasing probabilities with time,” she said.

“The bullish scenario will make it easier to get paid as it’s easier for both underlying to be above 100. Your risk-adjusted return is attractive in this particular environment,” she said.

Back testing

Future Value Consultants also offers back testing analysis. Normally the tests run for the last five, 10 or 15 years. For lack of sufficient history on the ETF, the back testing was only run for the last five years.

“We had a strong bull market and the frequency of negative outcomes is very limited in our analysis. If you had held this product for the last four years, your chances of losing money would have been less than 12%. This is in line with what we found in the bullish simulation,” she said. Investors would have been called on the first year 74.5% of the time, the back testing showed.

“This note would appeal to investors looking for a target return. It’s more of a growth type of product than an income solution,” she said.

“You need to have a view on the underlying, especially on the oil stock ETF.

“The rewards are quite high. You have a fair chance of earning a double-digit return.

“But obviously and given the volatility of the ETF, there is still risk and the potential for heavy losses is there.

Barclays is the agent.

The notes will price on April 20 and settle on April 27.

The Cusip number is 06746X5E9.

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