Barclays prices deals on Expedia, basket of airline stocks designed for travel bulls

By Emma Trincal

New York, July 2 – Barclays priced two structured notes deals allowing investors to express a view on one of the worst economic casualties of the coronavirus pandemic: travel and airlines.

As signs of an economic recovery have emerged despite a resurgence of new cases of Covid-19, investors attracted by low valuations are taking a closer look at the two depressed industries.

One of the deals is tied to a single stock. The risk associated with the exposure to a single company is somewhat mitigated by the payment of a fixed rate, an automatic call option and a low barrier.

Callable reverse convertible

Barclays Bank plc priced $10 million of 12.5% fixed-coupon autocallable notes due June 30, 2021 linked to the common shares of Expedia Group, Inc., according to a 424B2 filing with the Securities and Exchange Commission.

Interest is payable quarterly.

The notes will be called at par if the stock closes at or above its initial level on any quarterly determination date.

The payout at maturity will be par unless the stock finishes below its 50% downside threshold level, in which case investors will receive a number of shares of the underlier equal to the exchange ratio, which is the stated principal amount divided by the downside threshold level, or the cash value of those shares, at the issuer’s option.

Equity allocation

“You know you’re collecting at least 3% if you get called,” said Steve Doucette, financial adviser at Proctor Financial.

“And if you don’t get called, you can use the 12% as a buffer.”

Doucette also pointed to the low valuation of the stock. While the share price has seen a sharp rebound, it remains more than 40% off its 52-week high of last July.

“Getting that 12.5% return in a note is very attractive especially when you keep on hearing that we’re due for single-digit returns for the year to come,” he said.

“It’s hard to believe considering the rally we had since March.”

The market crashed in March but has strongly recovered since. The second quarter posted the best quarterly gains in 20 years for the S&P 500 index. Expedia has more than doubled since its March 18 low, strongly outperforming the S&P 500 index, already up 43% since its March 23 low.

“It’s an income note, but 12% isn’t bad really. It’s an equity allocation. I’m not a big single-stock type of investor. But it’s not a bad deal,” he said.

Rebound bet

Matt Medeiros, president and chief executive of the Institute for Wealth Management, said he liked the deal as well for cautiously bullish investors.

“The sector is very speculative at this time. But the structure and the entry point make this note attractive,” he said.

“The travel industry is facing some headwinds if we continue to close some businesses. But it also has the potential to strongly recover.

“The structure gives you a very conservative protection with this 50% barrier along with an attractive coupon.

“If one takes the position that the impact on the travel industry caused by the pandemic is only temporary, then this could be a very good note.”

Taking off with leverage

The second offering was directly based on the airline industry.

Barclays priced $20.13 million of 0% Accelerated Return Notes due July 30, 2021 linked to a basket consisting of three equally weighted airline stocks – Delta Air Lines, Inc., United Airlines Holdings, Inc. and Southwest Airlines Co.

The payout at maturity will be par of $10 plus 300% of any basket gain, subject to a maximum return of 57.9%, according to a 424B2 filing with the SEC.

Investors will be exposed to any basket decline.

Decimated industry

“This one is a little bit tricky because you don’t have the downside protection,” said Doucette.

“The other deal at least had a coupon to cushion some of the losses plus an amazing barrier. But here, you’re long on the downside.”

Despite recovering somehow from their early spring lows, all three stocks have begun to drop again early last month with rising coronavirus cases in several states.

“The pandemic, the cancelled flights have crushed the airlines,” he said.

“Who knows if they can even recover after what they went through last quarter?”

2020 earnings expectations have been slashed by more than 50% in recent months, analysts said.

“Unless the government continues to rescue them, any one of those airlines can go belly up,” he said.

The government in March passed a $50 billion bailout for the airline industry. But many said it may not be enough to offset the flight cuts and travel bans that have caused some of those companies to lose up to 95% of their revenues.

“How do you survive that?

“It’s a sector bet. The whole travel economy is a mess. It may recover in a year or it may take years. Who knows?”

While it seems less risky to bet on a basket of three stocks than on a single one, Doucette said he preferred the note on Expedia because it has a barrier.

“It’s a pretty risky basket to bet on. One stock goes under and it drags you all down.

“I’d rather have a little protection,” he said.

Alternate path with calls

Medeiros agreed, when looking at the airlines deal.

“All you do is get 300% participation on the upside, but you have 100% downside exposure,” he said.

“I would be better served buying call options a year out.

“I understand the appeal of investing in distressed securities, anticipating an appreciation once the industry recovers.

“But since you don’t have any downside protection, you’re better off getting your leverage with call options.

“It’s more efficient. And your risk is much lower.”

Morgan Stanley is the agent for the Expedia deal.

The Cusip number is 06741WHY9.

The fee is 0.2%.

BofA Securities, Inc. is the agent for the deal on the airlines basket.

The Cusip number is 06747H123.

The fee is 2%.

Both offerings priced on June 25.

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