Barclays’ $50.04 million callable notes on indexes boost yield with daily observation

By Emma Trincal

New York, Feb. 2 – Barclays Bank plc’s $50.04 million of trigger callable contingent yield notes with daily coupon observation due Jan. 30, 2025 linked to the worst performing of the Euro Stoxx 50 index, the Russell 2000 index and the S&P 500 index drew a strong bid for the double-digit yield paid on an index-based offering.

The issuer was able to provide the terms via the use of a specific type of observation for the coupon barrier as well as the inclusion of an issuer call. The choice of the underliers in the worst-of structure was also a factor.

The notes will pay a contingent quarterly coupon at an annual rate of 13.16% if each index closes at or above its coupon barrier level, 70% of its initial level, on each trading day during the relevant observation period, according to a 424B2 filing with the Securities and Exchange Commission.

The notes will be callable at par of $10 plus any coupon due on any quarterly observation date.

If the notes are not called and each index finishes at or above its downside threshold level, 60% of its initial level, the payout at maturity will be par. Otherwise, investors will lose 1% for every 1% decline of the least-performing index from its initial level.

American coupon

“They probably had to do the American coupon barrier in order to get a 13% rate on indices,” said a structurer.

The term “American” refers to the type of option used for the coupon barrier. “American” options – as opposed to the more typically used “European” ones – can be exercised prior to the expiration of the option contract, in this case on any day during a given quarter.

“You’re going to get better terms. It’s not unreasonable to have an American coupon in this context.” he said.

“It could be worse. It’s not as if the barrier breaches once and you lose all the coupons. This would be really crazy. I’ve never seen it, but technically it could be done. Once knocked out, the barrier would eliminate all the coupons.”

With this note, the observation is on any day but only during a given quarter, he added.

“If it breaches during that time, you lose your coupon for that period. But it doesn’t impact your future payment.

“The only difference with a European barrier is they just observe more dates. Obviously, it’s more risk so it juices up the yield a bit.”

Correlations

Another technique employed to increase the coupon was the use of three underlying with reduced correlations to one another. Disparities exist between two U.S. benchmarks and a European index as well as between two large-cap indexes (the S&P 500 and the Euro Stoxx 50) and the Russell 2000 index, which tracks the performance of U.S small-cap stocks, he noted, although the three picks are far from unusual in those types of deals.

Call option

Finally, the issuer call was another source of additional premium.

“That’s another way to juice up the coupon. It’s reasonable too,” he said.

“You’re taking the call risk anyway. There is just a bit more uncertainty because the issuer has the discretion to call or not call.

“They actually may not call for a number of reasons and that’s not necessarily a good outcome.”

One reason for the issuer not to call the notes if they have the choice to do so would be rising interest rates.

“They would have to pay higher rates on the new issue. So, they may not call,” he said.

Please, call me

The so-called “call risk” has two facets, he said.

One is the reinvestment risk. Once the notes are called, investors may not find market conditions as favorable as when the deal was priced.

However, with the recent equity sell-off and rise in interest rates, some buysiders have expressed concerns over the opposite situation.

“We’ve seen banks holding on to notes even when they have the option to call them. The notes are not getting rolled and that’s a problem,” said a distributor.

“Firms rely on those rolls so they can strike new ones and get their commissions. But lately we didn’t get the calls.”

“I think issuers prefer to hold on to the assets they have on their balance sheets. Some of those puts have gained more value during the sell-off.

“If they had to go back and restrike the notes after calling them, the puts that they hold would have a lower value, which would in turn reduce the market value they hold in their books.”

“They prefer to hold on to their existing positions.”

UBS Financial Services Inc. and Barclays Capital Inc. are the agents.

The notes settled on Friday.

The Cusip number is 06748A283.

The fee is 1%.

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