Barclays’ $2.25 million bearish digital plus notes linked to S&P favor bears with conviction

By Emma Trincal

New York, Dec. 9 – Barclays Bank plc’s $2.25 million of 0% bearish digital plus notes due Jan. 29, 2021 linked to the S&P 500 index provide a fixed positive return if the market finishes down by more than 10% over a short period of time, according to a 424B2 filing with the Securities and Exchange Commission.

The clearly bearish bet does not leave room for error, sources said, as investors make no money in a sideways market and lose money in a bull market.

If the index return is greater than 10%, the payout at maturity will be par minus 1% for every 1% that the index advances. If the index return is less than or equal to 10% but greater than negative 10%, the payout will be par. If the index return is less than or equal to negative 10%, the payout will be par plus 18.75%.

Contingent digital

The structure is akin to an inverse digital. Investors get paid a fixed return when the market goes down rather than up. A key difference, however, is that the index needs to go down beyond a threshold of negative 10% for the positive return to kick in, sources noted.

With most digital notes that are bullish, the trigger for the payout is above par, sometimes even below par (in-the-money digitals) but rarely at a higher level than par.

In this case a “high” water mark is imposed: the index must drop at least 10% below par to trigger the payout, which is the equivalent of putting the trigger 10% above par in a bullish digital note.

There are no structural differences in the protection between this note and a digital barrier note.

The loss of principal starting above positive 10% is the equivalent of a 90% barrier on the downside for the standard barrier of a digital. In both cases, the protection is knocked out once the barrier is breached and investors are either long or inversely long the index.

Not a sideways play

“You really have to have a very narrow and bearish approach for this deal to work in your favor,” said Kirk Chisholm, wealth manager and principal at Innovative Advisory Group.

“If the market trades sideways, between negative 10% and plus 10%, you’re not benefiting at all. You’re getting nothing.”

Historically, the market trends in that range 30% of the time, he noted, “so the odds are against you.”

The presidential elections in November 2020 added a layer of uncertainty.

“Until the elections, the market could rally significantly. After that, it’s more likely to drop,” he said.

Capped gains

The digital payout itself was a concern.

“If your opinion is that the market will go down, that’s OK. But I guess if it goes down a lot, you’re getting 18.75% and nothing more. Your upside is limited while your risk isn’t. The S&P could drop much more than 19%. If you’re bearish, you’re better off shorting the market or buying a put,” he said.

“There are many ways and better ways you can express a bearish view.”

On the other hand, if the market finishes positive and above 10%, investors have 100% of their investment at risk.

“I don’t find it to be a good risk/reward,” he said.

Two bad outcomes

Jerrod Dawson, director of investment research at Quest Capital Management, agreed.

“I’m not sure the structure provides enough to compensate you for the risk,” he said.

“We should have more volatility next year, and volatility can play against you if the market is up a lot.

“You lose dollar-for-dollar if the market is up more than 10%. You have an inverse exposure to the index.”

But the “big drawback” was the area comprised between negative 10% and positive 10%.

“If it falls in that range, you don’t get the 18.75%. If it’s down by less than 10%, your bearish bet is a no-win.”

Dawson said that the number of negative outcomes outweighed the positive ones.

“If it’s 10% below or 10% above par, you get nothing.

“It it’s above 10%, you lose.

“You’re only getting a positive return if it drops more than 10%.

“The odds are not one third, one third, on third. That’s true. But it’s still an asymmetrical risk/return given that you only have one scenario where you make money.

“If we have a year like this year with the market up 25%, you’ll lose 25%.

“I don’t expect that, but there’s still a risk.

“I suppose this is for someone whose view is aligned with this product. It wouldn’t work for me.”

Barclays is the agent.

The Cusip number is 06747NR30.

The notes settled on Dec. 2.

The fee is 2%.

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