Barclays’ $14.47 million market-linked step-up autocalls on bank stocks show sideways bet

By Emma Trincal

New York, Sept. 28 – Barclays Bank plc’s $14.47 million of autocallable market-linked step-up notes due Sept. 27, 2024 linked to basket of bank stocks provide a “decent” call premium, but the market risk at maturity may not justify getting paid a fixed call premium, which limits the upside, advisers said.

The basket consists of the common stocks of Goldman Sachs Group, Inc. (33.34% weight), JPMorgan Chase & Co. (33.33% weight) and Morgan Stanley (33.33% weight), according to a 424B2 filing with the Securities and Exchange Commission.

The notes will be called at par of $10 plus a call premium of 14.2% a year if the basket closes at or above its initial level on any annual call date.

If the notes are not called and the basket finishes above the step-up value, 135% of the initial level, the payout at maturity will be par plus the basket gain.

If the basket finishes at or below the step-up level but at or above the initial level, the payout will be par plus the step-up return of 35%.

Investors will lose 1% for every 1% basket decline from initial level.

No protection

Kirk Chisholm, wealth manager and principal at Innovative Advisory Group, objected to the one-to-one downside exposure at maturity.

“I don’t see much appeal to this note,” he said.

“From a positive angle, it’s a basket, not a single stock or a worst-of.

“But the lack of protection is a problem.”

Likely capped

Usually capping the upside comes with the benefit of some form of downside protection, which is lacking in this deal, he noted.

He conceded that there is no cap on the upside at maturity. But he argued that investors were unlikely to benefit from the uncapped upside exposure. Even if they did, their payout above the 35% step level would not differ from a long exposure to the price return of each stock.

“The last year gives you a no-cap scenario, but one that’s extremely unlikely,” he said.

“By definition you’re down at the end of the second year. So, you’d have to get a 35% positive return, which is extremely unlikely in a single year.

“The more realistic outcome is you’re getting the 14% premium at the end of year one, which is a decent outcome.”

Complexity

Perhaps an equally important drawback for this adviser was the “complexity” of the structure.

“It would be quite difficult for a retail investor to understand all the different moving parts of this product. It would also be quite difficult to model,” he said.

Outlook

The three underlying stocks have significantly outperformed the S&P 500 index this year. JPMorgan has gained 30.7%, Goldman Sachs, 47.7%, and Morgan Stanley, 48.9%, compared to the 15.9% positive return of the benchmark.

It remains unclear whether the bullish momentum will last, he said.

“To be sure, banks would benefit from a steeper curve and higher rates. But we can’t speak to what might be,” he said. He made this comment as the stock market sold off on Tuesday in reaction to a sharp and sudden rise in Treasury yields sending the S&P 500 index 2% lower.

“Personally, I believe there’s a limit on how higher rates can go. Bank stocks have done well. A lot of companies have done well. But not having any downside protection is a non-starter,” he said.

In general, this adviser is not very bullish on bank stocks.

“I don’t think the economy is supportive of their growth,” he said.

Narrow window

Jonathan Tiemann, president of Tiemann Investment Advisors, said the notes were designed for investors with a mildly bullish view on banks.

“As an investor, I guess you’re betting that bank stocks will fluctuate in a fairly small range,” he said.

“The year one and year two autocalls offer a reasonable payout. My concern is what happens at maturity.”

He also pointed to the low probability of a scenario in which investors would gain full participation in the upside above the 35% threshold.

“If you’re negative after the first year and still negative after the second year, you should probably give up the idea of getting more than the 35% return. The no cap is kind of a throw away. It was probably easy to hedge for the issuer because it’s so unlikely,” he said.

Best outcome

The two autocallable payouts made the most sense, according to this adviser.

“The real action is year one and year two. That seems like a reasonable trade. You’re giving up some upside and the dividends. But 14% a year is a pretty good number,” he said.

Going back to the maturity payout, he noticed that the 35% booster was significantly less than what would have been a call premium on the third year, applying the 14.2% annual return, which would have been 42.6% for the period.

“What’s a bit weird is the payout at maturity because it falls under a narrow set of conditions,” he said.

“Somebody must have designed this note for a specific purpose. The underlying investment view is not all that clear to me.

“I guess the bet is that those larger financial companies are going to post soft returns but not lose a lot.

“In a way, it’s conceivable. They all had such a good run.

“But they could also have a negative return, and you don’t have any downside protection.”

BofA Securities, Inc. is the agent.

The notes will settle on Thursday.

The Cusip number is 06747X656.

The fee is 2%.

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