Barclays’ annual autocall notes tied to index, ETF combine attractive features, sources say

By Emma Trincal

New York, June 12 – Barclays Bank plc’s 0% annual autocallable notes due June 26, 2023 linked to the lesser performing of the S&P 500 index and the SPDR S&P Oil & Gas Exploration & Production exchange-traded fund borrow features from a digital payout, an autocallable with cumulative call premium as well as the potential for absolute return gains, making the structure somewhat unusual, sources said.

The notes will be automatically called at par plus an annualized call premium of 11% if each underlying closes at or above its initial level on any annual call valuation date, according to a 424B2 filing with the Securities and Exchange Commission.

If the notes are not called and the final level of the lesser-performing underlying is at least 60% of its initial level, the payout at maturity will be par plus 44%. Otherwise, investors will lose 1% for each 1% decline of the lesser-performing underlying from its initial level.

Memory

The 44% final digital return, which is the fourth payment of the premium at maturity, (sometimes referred to a “memory” call as the fixed return can be captured at a later date) is not an uncommon feature, sources said. The call threshold stepping down to a barrier level at maturity allowing for a digital gain on the downside is also far from rare. Less common is the combination of those two features.

Combo

“If you want to maximize your chances of getting paid regardless of what’s happening in the market, that’s a good way to do it,” said Matt Rosenberg, sales trader at Halo Investing.

“It’s an autocall with a digital call option at maturity.”

Normally, the call gets exercised above the initial level or in options language “at-the-money.” In this case, the payout is triggered even if the index is negative as long as it does not breach the 60% barrier.

“We do see the marriage of a digital product and an autocall, all in one. That’s what makes it unique,” he said.

Downside boost

The benefit is the “absolute return”-like feature of the note. Such return is delivered through a digital option, which increases the likelihood of outperforming the reference asset on the downside.

For instance, if the worst-performing asset drops 40%, investors will pocket a 44% positive return, which is an excess return over the underlier of 84 percentage points.

“Whether you classify it as a digital product or growth product, you provide terms that enhance your potential return and that’s a net plus for the client,” said Rosenberg.

Double whammy

Brady Beals, head of product origination at Luma Financial Technologies, pointed to some of the risks associated with one of the underliers.

“The deal takes advantage of the recent price drop in oil. With XOP though, you’re dealing with a very volatile underlying,” he said referring to the SPDR S&P Oil & Gas Exploration & Production ETF, which is listed on the NYSE Arca under the symbol “XOP.”

Two factors contribute to this heightened volatility.

First, the ETF tracks an equally weighted index, the S&P Oil & Gas Exploration & Production Select Industry index.

“Because of the equal-weighting approach, you get small-cap stocks that are considerably more volatile and it has an impact,” he said.

Second, the ETF shows a high correlation to the price of oil, he added.

“It’s a double whammy in terms of volatility.”

But the deal may have its place as a tactical allocation.

“I don’t necessarily love that pairing from an investment point of view. But as a tactical bet, it allows you to lock in short-term gains while getting a safety feature if you’re wrong.

“So I think it’s a pretty good structure.”

Barclays is the agent.

The notes will price on June 21.

The Cusip number is 06747MYF7.

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