Advisers pick deep barrier, lower rate when comparing two Barclays notes on value benchmarks

By Emma Trincal

New York, March 9 – Advisers examined and compared two recently issued income notes linked to the value segment of the U.S. equity market coming from Barclays.

The first note –an 18-month autocall –pays a contingent coupon. The second one –a 15-month with issuer call –offers a lower but fixed rate and a more defensive barrier at maturity.

Higher coupon at risk

Barclays Bank plc priced $10.87 million of phoenix autocallable notes due Sept. 9, 2022 linked to the S&P 500 Value index, according to a 424B2 filing with the Securities and Exchange Commission.

The contingent quarterly coupon is 9.35% per year and the coupon barrier is at 70%.

The notes will be called at par plus the contingent coupon if the index closes at or above its initial level on any quarterly call observation date.

The barrier at maturity is 70%.

Fixed rate, deep barrier

Separately, this issuer priced $8.59 million of 7.01% trigger callable yield notes due June 8, 2022 linked to the iShares Russell 2000 Value ETF, according to a 424B2 filing with the SEC.

Interest is payable monthly.

The notes are callable monthly after three months.

The payout at maturity will be par unless the ETF finishes below its 55% downside threshold level, in which case investors will lose 1% for each 1% decline of the ETF.

Fixed-income substitute

Financial advisers compared the autocallable note with a guaranteed coupon and a deep barrier with the callable security offering less protection but a higher coupon, albeit a contingent one.

“I think I would be comfortable using the second one as a fixed-income replacement,” said Tom Balcom, founder of 1650 Wealth Management.

“The coupon is guaranteed. Right now, the 10-year Treasury is 1.53%. In comparison this one gives you 7% over a 15-month term.”

“Treasuries carry interest-rate risk, which you don’t have here,” he said.

The underlying ETF covers small-cap value stocks extracted from the Russell 2000 index and therefore displays some volatility, he noted. Valuations were also a concern.

“There’s been a huge run-up and this fund is at all-time highs so it makes sense to have more downside protection.”

The iShares Russell 2000 Value ETF hit an all-time high on Tuesday. From the pandemic sell-off of a year ago, its share price has gained 135%.

“This low barrier is necessary. Can it be breached? Not likely. But there’s still a risk and for that risk, they’re paying you 4.5 times the 10-year.”

High-yield replacement

The second note, which offers an additional 2.35 percentage points in interest rate would be more of a high-yield substitute, he said.

“There is less protection, but the underlying is large-cap value stocks. The volatility is not that high and for that type of exposure, you get a generous coupon,” he said.

“Just like high-yield bonds, your risk is very much correlated to the equity markets.”

The second note could be also used as equity replacement, he noted.

“You just have to accept that you’re capped. If the index is up 30%, you can’t really complain. You bought this for the protection.”

Safety first

Another financial adviser said he preferred the lower barrier note as well.

“Many value stocks have been rallying since October. They’re actually outperforming the S&P right now,” this adviser said.

“Small-cap value stocks used to be more undervalued. Now they caught up big time. I think you’re exposed to downside risk in both deals. Value is up in general.”

The S&P 500 Value index is up almost 30% since October; the iShares Russell 2000 Value ETF gained nearly 60% during the same period.

“With such a huge rally, the 55% barrier is a much better choice,” he said.

Unlike some advisers and investors objecting to the idea of a discretionary call, this adviser welcomed the feature, which helps enhance the coupon.

Issuer call

“They’re not going to call it if it’s down. So, you continue to collect your coupon regardless and at least you get a good protection.

“If the index is up, they’ll call it and the risk is gone,” he said.

“I’m not saying it can’t drop 45%. It is possible.”

In fact, the barrier would have breached a year ago amid the pandemic-induced bear market which saw the ETF share price drop 46% between mid-January and March 23.

But the dramatic market sell-off preceded a global stock market rally.

“I think you have a better chance of coming out with a profit even if the index is down. And if it’s higher, you get called away: nothing wrong with that.

Better risk-reward

He compared the note with the other one paying a higher coupon rate on a contingent basis.

“The difference between 9.35% and 7% is not enough to compensate you for the greater risk,” he said.

“Your coupon is at risk, but most important, your principal is more at risk.

“You’re much more likely to see the index drop 30%. With current market valuations, it’s just not enough.

“The one with the deeper barrier pays a little bit less, but it’s guaranteed, and you have a better chance of coming up ahead.”

The 15-month notes with the fixed rate (Cusip: 06747A279) priced on March 3 and settled on Monday.

UBS Financial Services Inc. and Barclays are the agents.

The autocallable contingent coupon note offering (Cusip: 06748EAR4) priced on March 4 and settled on Tuesday.

Barclays is the agent.

The fee is 0% for both deals.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.