Barclays’ $42.74 million market-linked step-up autocall attest to renewed interest in Russell

By Emma Trincal

New York, Dec. 12 – Barclays Bank plc’s $42.74 million of 0% autocallable market-linked step-up notes due Nov. 29, 2024 linked to the Russell 2000 index showed an above average size for a deal tied to an index that has been for a while out of favor, indicating a reverse sentiment for small-cap stocks.

The notes will be called at par plus an annual call premium of 6.3% if the index closes at or above its initial level on any annual observation date, according to a 424B2 filing with the Securities and Exchange Commission.

If the index finishes above the step-up level – 135% of the initial level – the payout at maturity will be par of $10 plus the index gain.

If the index gains by up to the step-up level, the payout will be par plus the step-up payment of 35%.

Investors will receive par if the index falls by up to 15% and will be exposed to losses beyond 15%.

Small-cap momentum

The Russell 2000 has been regaining favor recently, hitting a fresh 52-week high on Thursday.

Up 22% for the year, the index is only 6% below its all-time high of August 2018.

Small-caps were out of favor as the Russell 2000 lagged the performance of the S&P 500 index for several years in a row.

But investors are bidding on the asset class again as the economy is showing strength.

Not coincidentally, issuers have been pricing more notes on the Russell 2000 as a sole underlier in the past few weeks, some of which in record sizes.

Barclays Bank’s $42.74 offering, which was distributed by BofA Merrill Lynch and settled last week, is an example.

The following day Bank of Nova Scotia issued $104.31 million of 18-month leveraged notes on this benchmark, one of the top 10 offerings of the year in size, which Goldman Sachs & Co. acting as the dealer.

Valuation issues

But some registered investment advisers were not keen on the structure.

“I think you’re locking yourself up for a 6% return,” said Steve Doucette, financial adviser at Proctor Financial.

“The optics isn’t going to be good on a five year. If it’s down, it’s not going to track the index. The value of the note is going to go down even though there’s a protection component.”

This can be a problem for an adviser who needs to answer questions at any time about client’s positions.

While the notes are more likely than not to be called, if investors have to hold them for a certain amount of time, they may not be happy with what they see on their statement, he said.

“Clients tend to look at their portfolio when it’s down. If the note is still priced at 86 it looks like a 14% loss. You may tell them: ‘don’t worry, it’s got a 15% buffer.’ It might not make a difference.

“They will be holding the notes and not getting paid.”

Leverage preferred

Having the uncapped upside at maturity if the index finished above the 35% step level was “nice” but the odds of being long the index were small, he said.

It would mean the automatic call would have failed to occur four years in a row.

The most probable outcome was the call.

“You’re locking your money up for 6%. I can’t get too excited about it,” he said.

“If it was levered up, it might be all right. But with this structure, the chances of outperforming the index are limited.”

Since 2009, the Russell 2000 index has been up less than 6% only once, in 2014 with a positive return of 3.5%.

Performance was moderately negative twice, in 2011 (minus 5.45%) and in 2015 (minus 5.71%).

Its greatest drawback for the period was in 2018 with a 12% decline. Naturally, no loss gets close to the 34.8% decline in 2008.

Still at risk

Right now, however, the trend is bullish.

“I honestly think you’ll get called before maturity,” he said.

“I guess you could put it in your fixed-income allocation.

“But it’s not really income because you’re only getting paid when you’re called.

“Plus, you still have 85% of your principal at risk. In theory you shouldn’t be too worried about the downside with a 15% buffer, especially five years out. But you never know really.”

This adviser was unimpressed by the notional size of the offering.

“I guess they’re selling the coupon. It’s sold, not bought,” he said.

Premium versus coupon

Jeff Pietsch, head of capital markets at the Institute for Wealth Management, did not like the long maturity combined with a series of annual autocalls.

“I worry about the complexity about the sequences of returns in assessing this note,” he said.

“I always prefer a plain-vanilla structured product.”

Not knowing what the actual duration of the product would be was definitely a top concern.

Another one was the fact that the notes do not pay income when held. Investors only receive a call premium upon the call if one occurs.

“There is no income stream, and that’s part of the problem,” he said.

“You’re making a big bet, five years out with a small buffer and all these call features.”

The Cusip is 06747D593.

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