Barclays’ $4.5 million phoenix autocalls on four tech stocks designed for growth, risk-takers

By Emma Trincal

New York, June 13 – Barclays Bank plc’s $4.5 million of phoenix autocallable notes due June 11, 2026 linked to the least performing of the stocks of Alphabet Inc., Amazon.com, Inc., Apple Inc. and Microsoft Corp. offer an eye-popping coupon but for a reason, advisers said. The underliers are emblematic of what some analysts call the “AI gold rush” and may be vulnerable to a pullback.

The notes will pay a contingent monthly coupon at an annual rate of 14.1% if each stock closes at or above its 60% coupon barrier on a related observation date, according to a 424B2 filing with Securities and Exchange Commission.

The notes will be called at par plus the contingent coupon if each stock closes at or above its initial level on any quarterly observation date after one year.

If the notes are not called and each stock finishes at or above its 60% barrier level, the payout at maturity will be par plus the final coupon. Otherwise, investors will be fully exposed to the decline of the worst performer from its initial level.

Nice rally

“Obviously single stocks plus worst-of means more risk. At least these are all tech stocks. They are highly correlated to one another. But they’re also extremely volatile,” said Tom Balcom, founder of 1650 Wealth Management.

For the year, Alphabet, Apple, Amazon and Microsoft have each gained at least 40% or higher.

“Those stocks have had a nice rally making new highs since last fall. It’s been driven by the market’s appetite for AI. We could see a pullback given the intensity of this rally,” said Balcom.

Since their lows in November, Microsoft and Alphabet have surged 57% and 48%, respectively.

“Could those stocks fall by more than 40% in three years? I think the chances are slim because a 40% drop over that period would be huge. If I had to guess, I would think it’s a single-digit probability. Yet, there is still some risk on the downside. There’s a reason you’re getting this 14% coupon,” he said.

A good way to assess the risk of a security is to measure its yield compared to the risk-free rate, he said.

“The spread of this coupon over a 5.25% short-term Treasury is pretty juicy. You’re getting compensated to take on that kind of risk.,” he said.

Fragile Alphabet

If he had to guess which of the four stocks may end up being the least performing one, Balcom cited Alphabet.

“Apple and Microsoft have strong revenues from their franchises, their software subscriptions, the cloud and the iPhone for Apple. Amazon it the dominant e-commerce powerhouse. Only Google may be vulnerable because developments in AI could become a threat to its search business,” he said.

No-call, barrier

The one-year no-call made the notes more attractive.

“When you get called too soon, what do you do with the proceeds? It’s always a time-consuming process and you run the risk of rolling your funds into a lower-yielding note. That one-year no-call is great for investors and advisers alike.”

The 60% barrier level is the same for principal-repayment at maturity and coupon payment.

“I can see some risk at maturity. It’s a three-year. The longer the duration, the more chances of breaching the barrier,” he said.

Allocation

Balcom said that he would only show the notes to investors familiar with those names and willing to take risks in their search for higher yields.

“Obviously 14% is pure equity replacement. It would fit into an aggressive growth portfolio within the equity bucket,” he said.

“I wouldn’t put it in fixed-income because this note produces risk. Fixed-income is not supposed to produce risk.”

High-yield may be the exception.

“If it had to go to a fixed-income portfolio, it would only be within the high-yield bucket. High-yield instruments are riskier by definition,” he said.

Coupon at risk too

Steven Jon Kaplan, founder and portfolio manager of True Contrarian Investments, said the investment was too risky to be considered even by aggressive investors.

“Those four stocks are definitely affected by the AI bubble we’re currently going through,” he said.

“They’re all very inflated. They all have significant downside risk.”

Investors will face market risk at maturity. But the coupon was also at risk.

“You’re likely to miss some coupons, and since there is no memory, you can’t really bet on a 14% annual return,” he said.

AI gold rush

Autocallable notes are usually best for range bound bets, he noted. Investors do well if the price moves upward from the barrier level to the coupon rate.

For Kaplan, the choice of the underlying stocks was not a good fit for this strategy.

“These are not range bound stocks. They’re not well-behaved utilities shares. Those overvalued big tech stocks are not going to stay in a range. They’re going to go way up or way down,” he said.

The popularity of those stocks, the rush into AI and the momentum around a limited number of big tech companies made the trade particularly hazardous, he added.

“People should stay away from bubbles. Those stocks have gone through the roof. Many investors think they’ll continue to rise. It’s a bubble,” he said.

For Kaplan, investors have become very bullish because they believe that last year’s bear market is over.

“But that was just the beginning.

“This is like the month of October. In October, the weather can warm up a lot, and people think it’s the summer again. It warms up until it gets cold.”

Barclays is the agent.

The notes settled on Monday.

The Cusip number is 06745MHM3.

The fee is 3%.

© 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.