RBC’s barrier booster notes linked to S&P offer alternative to leverage in uncertain market

By Emma Trincal

New York, April 15 – Royal Bank of Canada’s 0% barrier booster notes due April 20, 2026 linked to the S&P 500 index give investors a distinct form of return enhancement by guaranteeing a minimum return if the market is up or flat, which in a slow growth environment may be more advantageous than a leveraged payout.

Unlike classic digital notes, this one does not cap the upside, which allows bulls to bid on those products as well.

If the index return is greater than the booster percentage, the payout at maturity will be par plus the index return, according to an FWP filing with the Securities and Exchange Commission.

The booster percentage is expected to be 35% to 55% and will be set at pricing.

If the index return is zero or positive but does not exceed the booster percentage, the payout at maturity will be par plus the booster percentage.

If the index return is negative but greater than or equal to negative 30%, the payout will be par.

If the index return is less than negative 30%, investors will lose 1% for every 1% that the index declines from its initial level.

Moderate growth ahead

“It’s a fair deal. The 70% barrier is very close to what we think the market could go down to,” said Andrew Valentine Pool, main trader Regatta Research & Money Management.

“Six years from now, I’d like to think the U.S. stock market will be in a much better shape.”

The notes make sense if the market outlook is moderately bullish.

“I think that’s a good deal mainly because with what’s going on in the market right now, companies are going to run a tighter ship. We will see it in corporate earnings. So, if the S&P tends to be flat or range bound over the next few years it wouldn’t come as a surprise to me.

“That’s how the minimum return comes handy.

“I also like not having the cap because if we see more growth in the years ahead, we can still fully participate in the upside.”

Call, no call

Matt Rosenberg, head of trading and strategic initiatives at Halo Investing, said the structure is timely.

“We see a lot of those digital plus. You get a digital payout plus the uncapped return above that,” he said.

“I like it.”

This type of payout can also be delivered in an autocallable format, he noted.

One of Bank of America’s best-selling products known as “market-linked step-ups” offer the same payout at maturity. But the main difference is the automatic call.

$164 million step-up

An example of this product came out early this month.

BofA Finance LLC priced $164.34 million of six-year market-linked step-up notes tied to the S&P 500 index.

If the index finishes up but below a 130% step-up value, investors get par plus 30%. Above 130%, they get par plus the index return.

The main difference is the autocallable feature. Investors receive an 11.83% annual call premium if the notes are called when the underlying is above its initial price on an annual observation date.

The downside of the BofA deal was slightly different as it offered a 15% buffer instead of the 30% contingent protection.

“When there is no autocall like this RBC deal, you get a better yield,” Rosenberg said.

“You’re not collecting a periodical coupon. You’re only getting paid at maturity. So, you’re being compensated for that.

This would explain why, when comparing two nearly identical notes, the BofA autocallable deal would have a lower digital payout.

“An autocall gives you the opportunity to reinvest your principal. While some people see it as a negative, I personally think it’s a plus. You can adjust your market outlook when the market changes.”

“But definitely, the point-to-point product gives you more yield,” he said.

Return enhancement

Those digital notes which do not cap the upside can be useful when investors are unsure about the future direction of the stock market. Leverage notes may be more appropriate for bulls while digital products can better enhance a flattish performance.

“If the market is going nowhere, the digital plus helps. At least you’re getting a minimum return,” he said.

“If you’re wrong and the market turns out to be better than expected you can still get the upside with no limitation.

“It’s a good alternative to leverage, a good way to get a decent return on a per annum basis.

On March 27, Royal Bank of Canada priced $1.77 million of another six-year barrier booster on the S&P 500 index. The booster was set at 47%. The barrier was also at 70% of initial price, according to a 424B2 filing with the Securities and Exchange Commission.

RBC Capital Markets, LLC is the agent.

The notes will settle on April 20.

The Cusip number is 78015KMM3.

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