Barclays’ $47.05 million contingent income autocalls on Tesla draw heavy bid for yield

By Emma Trincal

New York, Jan. 12 – Morgan Stanley recently priced large offerings on Tesla Inc., exemplifying investors’ eagerness to secure double-digit yields out of well-established names despite the rich valuation associated with large-capitalization growth stocks.

One of the most recent ones was Barclays Bank plc’s $47.05 million of contingent income autocallable securities due Jan. 10, 2025 linked to Tesla, according to a 424B2 filing with the Securities and Exchange Commission.

If the shares close at or above the downside threshold level, 50% of the initial share price, on a quarterly determination date, the notes will pay a contingent payment that quarter at an annualized rate of 15.3%.

The notes will be called at par of $10 plus the contingent coupon if the shares close at or above the initial share price on any quarterly determination date other than the final determination date.

If the final share price is greater than or equal to the downside threshold level, the payout at maturity will be par plus the final contingent coupon. Otherwise, investors will lose 1% for every 1% that the final share price is less than the initial share price.

Barclays is the agent, but Morgan Stanley Wealth Management is the dealer.

The notes (Cusip: 06748A622) priced on Jan. 7 and settled on Wednesday.

Morgan Stanley distribution

“If it’s within Morgan Stanley’s private bank, it may be a deal associated with their internal equity research. It’s probably a retail offering distributed within a large organization, not an advisory trade,” said Matt Rosenberg, director at Halo Investing.

“It shows how the structured notes industry has evolved. It’s not just S&P trades that are getting significant size now. Single stocks can generate big deals as well.”

Some may argue that Tesla is one of the most overvalued stocks in the market with a P/E/ ratio of 345.

Since the market bottom of March 23, 2020, Tesla has seen its stock price move 13.5 times higher from $82.10 to $1,106.22, its closing level on Wednesday.

Seth Goldstein, senior equity analyst at Morningstar, said that he “agree[s] with just about everyone else that Tesla is a disruptor, but it's a terribly overpriced disruptor today.”

EV champion

Yet Tesla continues to be a popular trade.

“The car industry is moving towards electric vehicles, and Tesla is the uncontested market leader,” said Rosenberg.

“Using it for income makes sense. The stock had a big run up in the past two years. You can generate a 15% return and be moderately bullish. You still get a 50% downside protection, which is substantial.”

Tesla incurred sharp sell-offs last year but not close to a 50% drawdown and followed by sharp rebounds. The stock dropped 28% between Nov. 4 and just ahead of Christmas. It fell by 39% from the end of January last year until late May.

Wall Street continues to be bullish on the carmaker, especially after the company reported strong fourth-quarter and full-year vehicle delivery numbers last week.

Goldman Sachs upgraded Tesla earlier this week with a price target of $1,200.

More aggressive version

UBS AG, London Branch priced and distributed its own Tesla deal on the same day but for only $1 million.

The yield however was noticeably higher. The two-year Tesla-linked notes (Cusip: 90302P720) pay a quarterly contingent coupon of 26.59% per annum and are automatically called if the share price is at or above initial price on any quarterly observation date. The coupon and final barrier level was set at 60% of the initial price.

“It’s really impossible to compare those two deals. Some people like to see longer tenors just in case the market is down. You’re less likely to breach the barrier over a longer maturity,” Rosenberg said.

“The second one has less downside protection. A 15% to 26% coupon is a large pick up. But you go from a 50% to 60% barrier and from a three-year to a two-year. These two things have an impact on pricing.

“You have a more aggressive risk appetite. You get rewarded for it.”

The most important factor behind the higher coupon was the reduction in the barrier size, a sellsider said.

“The coupon on the UBS deal is driven by the barrier not the maturity. It’s easier to be down 40% than 50% so that’s what lifts the coupon,” he said.

Popular offerings

Big Tesla trades are becoming more common. Morgan Stanley Wealth Management priced another pair of big deals at the end of last month.

The largest one (Cusip: 90285D538) was UBS AG, London Branch’s $52.72 million of three-year autocallable notes paying a contingent quarterly coupon of 18.55% a year. Both the coupon barrier and downside threshold at maturity are set at 55% of the initial price.

The other trade was another three-year deal (Cusip: 06748A648) issued by Barclays Bank for $31.88 million. It showed terms similar to those of the offering sold by this issuer last week with barriers set at 50% and a contingent coupon of 15.05% paid quarterly.

The sellsider said he was not surprised by the size of these offerings.

“Anything attached to very well-known names paying double-digit coupon is pretty much going to sell,” he said.

“There’s such a need, such a desire for yield out there, whether it’s on Tesla, Amazon or Apple. If you can also offer a decent protection, it’s pretty easy to sell.”

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