Barclays’ $23.03 million market-linked notes on MSCI Europe use less common proxy for Europe

By Emma Trincal

New York, May 9 – Barclays Bank plc’s $23.03 million of 0% market-linked notes due May 6, 2021 linked to the MSCI Europe index offer exposure to European equity markets as an alternative to the Euro Stoxx 50, the well-known benchmark for blue-chip stocks in the euro zone. While the European benchmarks have similarities, one of the striking differences between the two is their level of adoption among retail investors, according to data compiled by Prospect News.

The recently priced deal is only the sixth one to be linked to the MSCI Europe index so far this year, the data showed. In comparison, 371 offerings of Euro Stoxx 50-linked notes have been brought to market during the same time.

The notional for Euro Stoxx notes is $2.66 billion versus $75 million for MSCI Europe index-linked notes.

U.S.-centric market

The big picture for many market participants is investors’ bid on non-U.S. equity.

“It’s good to see people diversifying away from the S&P,” an industry source said.

“People are saturated with the U.S. They need international exposure too.”

To be sure, the S&P 500 index remains the top underlier with $3.2 billion in notional through 546 deals year to date, according to the data.

“Our clients are very, very domestic,” said a market participant.

“I’m not sure if it makes a difference whether you show them the Euro Stoxx or another European benchmark. They’re not familiar with European stocks or other markets. They want to stick with U.S. equity as an asset class.”

However, the bid on the Euro Stoxx 50 has been building up over the few recent years, making this index the second most popular after the S&P 500.

MSCI Europe

If investors ‘appetite for European stocks is increasing, why not use alternatives to the Euro Stoxx 50 such as the MSCI Europe index, which has its own benefits, some may ask.

For instance, the MSCI Europe index with more than 400 constituents offers greater diversification than the 50 names in the Euro Stoxx index. Its geographic diversification is also broader with 15 European countries versus 11. The MSCI Europe index includes non-euro zone countries, such as the U.K., the top country with a 28% weighting.

An index specialist offered an explanation.

“It’s not demand-driven. The reason you have this massive amount of Euro Stoxx deals is because it’s such a liquid index. You have a very active futures and options market on the Euro Stoxx, which makes products much easier to hedge.

“Traders prefer that. That’s how you get better pricing.”

Hedging is also made more complicated because the MSCI Europe index tracks a wider universe, he said.

“When you have a wide index like the S&P, it doesn’t matter. It’s so liquid, it’s irrelevant. But with the MSCI Europe, you would need a proxy hedge, you’d have to use options on the Euro Stoxx, which is not a perfect hedge.”

Protection

The payout at maturity for the $23 million Barclays deal will be par plus 182% of any index gain, according to a 424B2 filing with the Securities and Exchange Commission.

If the index finishes flat or falls, the payout will be par plus the index return, subject to a floor of 90% of par.

“It’s a good trade,” said the industry source.

“Intriguing structure... The market tanks...I’m really covered. You can go out and play golf,” the market participant said.

Morgan Stanley

Barclays is the agent with Morgan Stanley Wealth Management as dealer, according to the filing.

Data compiled by Prospect News showed that each of this year’s MSCI Europe deals was distributed by Morgan Stanley. Last week’s offering is the largest so far.

The second one in size came from GS Finance Corp., which issued $19.78 million of three-year barrier leveraged notes.

Morgan Stanley distributed the other deals on behalf of Credit Suisse AG, Nassau Branch, JPMorgan Chase Financial Co. LLC as well as its own issuing subsidiary Morgan Stanley Finance LLC.

The notes (Cusip: 06746R841) settled on May 3.

The selling commission is 2.5%.

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