Barclays’ $10 million autocalls on SPDR Dow Jones show intriguing pricing, sellsiders say

By Emma Trincal

New York, Jan. 18 – Barclays Bank plc’s $10 million of autocallables due Jan. 17, 2024 linked to the SPDR Dow Jones industrial average ETF trust offer several attractive features, sellsiders said, citing the double-digit contingent coupon, single asset exposure, buffered protection and short-term tenor. They strived to understand how the issuer had been able to price those terms.

Investors will receive a coupon of 10.55%, payable monthly, if the ETF closes at or above its 87% coupon barrier on the observation date for that period, according to a 424B2 filing with the Securities and Exchange Commission.

The securities will be called automatically at par if the ETF’s closing level is greater than or equal to its initial level on any monthly valuation date.

At maturity, the payout will be par unless the ETF finishes below its 87% buffer level, in which case investors will lose 1.14943% for each 1% decline of the ETF beyond 13%.

Entry price

“Geared buffers have become really popular, but I haven’t seen any on a Phoenix autocallable like this one,” said a structurer.

“Autocalls are built around barriers, not buffers, so this aspect of the deal is interesting.”

In addition to the buffer, investors are getting “an attractive entry level,” as “the market has already come down in 2022,” he said.

The SPDR Dow Jones industrial average ETF trust dropped 7% last year. When the notes priced, the underlying ETF closed at $337.23, approximately 6% off its 52-week high of February, which was $358.10.

“I wonder how they priced the 10.55% coupon. It’s a very high interest rate for a single asset exposure. That’s more than twice the one-year Treasury yield,” he said.

Shortened duration

One characteristic of the structure was the monthly automatic call, which can be triggered as early as one month after pricing, he noted.

“It’s a one-year. If the market is down as some people expect, you’re not getting called. But if it’s up, you can get called on the first month,” he said.

This represented for some advisers a “call risk,” requiring further efforts to replace the securities with a similar product. But it also helped pricing, he said.

“The fact that you can get called in one month allows you to raise the coupon because it shortens the expected life of the trade.

“The shorter the call period, the shorter the duration. The note is probably not going to live very long. Even if it’s not called, the issuer only has the obligation to pay for one year,” he said.

The low cost of the trade was another advantage.

“A 0.2% commission is pretty low. It’s got to be for advisers’ accounts. If you get called on the first month, you made a little more than 1% for one month. You have some cash. You can wait and see what happens,” he said.

“To me, this is a ‘wait-and-see trade.”

Recapturing liquidity may be especially helpful in an uncertain market, he added.

Gearing

Instead of using the typical barrier, the issuer priced a 13% buffer for the downside protection. The gearing attached to the buffer was central in providing a competitive yield, he noted.

“It’s the gearing on the buffer that makes the pricing of the coupon very affordable,” he said.

He used his own model to price the deal. The trade date was Jan. 11.

“Based on today’s levels, I’m getting a 10.4% coupon with a geared buffer,” he said.

“It’s close enough,” he said in reference to the deal, which priced on Jan. 11

The same buffer without a gearing led to a 9.5% coupon, he said.

“That’s a 90-basis points difference. The gearing gives you a much better coupon. A difference of approximately 1% is meaningful,” he said.

Buffer, fee

A sellsider made similar observations. For instance, he also expressed surprise at the use of a geared buffer.

“You see geared buffers on many products, especially leveraged notes, but typically not on contingent coupon autocalls,” he said.

He said he also liked many of the terms of the notes, citing the single underlier, coupon rate, one-year maturity and the buffered protection.

The fee and the call structure were the main factors contributing to those terms, he added.

“The commission is extremely low. It’s not a brokerage deal. That’s something that can definitely improve the terms, especially the coupon,” he said.

The issuer had to “figure out” how to price not just the double-digit coupon but also the buffer, which is always expensive, he noted.

“A 25% barrier will be more affordable than a 13% buffer. We all know the difference between contingent and hard protection. Once your barrier is breached your entire principal is at risk,” he said.

Secret sauce

Investors who purchased the notes were conservative, he said.

“Each time you have a buffer – geared or not – the idea is to make the note more defensive. The client was looking for two things at the same time: a double-digit yield and a conservative protection.

“That’s why they’re OK if the notes get called in February.”

This sellsider was surprised about the absence of any call protection even for a shorter-dated note.

“They usually give you at least three months. The absence of any no-call, that’s a big contributor to these attractive terms. It really helps pricing. I would say that’s factor number one.

“Number two, the very tight commission. Obviously, it represents more value to the investor.

“It all boils down to those two things: the one-month call and the skinny fee,” he said.

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

The notes settled on Tuesday.

The Cusip number is 06749NGV8.

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