Barclays’ callable contingent coupon notes on indexes seen as ill-fitted for asset allocators

By Emma Trincal

New York, Aug. 7 – Barclays Bank plc’s upcoming callable contingent coupon notes due Aug. 13, 2026 linked to the least performing of the Nasdaq-100 index, the Russell 2000 index and the iShares Russell 2000 Value ETF may not be appealing to financial planners seeking to use structured notes as part of their asset allocation, advisers said.

The notes pay a contingent monthly coupon at an annualized rate of 10.5% if each underlier closes at or above its coupon barrier level, 65% of its initial level, on the valuation date for that period, according to a 424B2 filing with the Securities and Exchange Commission.

The notes are callable at par monthly after three months.

If each underlier finishes at or above its 65% final barrier, the payout at maturity will be par. Otherwise, investors will be fully exposed to the least performing underlier’s decline from its initial level.

Worst of

“I wouldn’t touch it,” said Carl Kunhardt, wealth adviser at Quest Capital Management.

“I’d start with this: where do I place this note in the portfolio? Nowhere.

“You pick three underliers. They happen to be pretty volatile. And you get the worst of the three. That’s going to be your base exposure.”

The contingent monthly coupon and the barrier were the “only interesting pieces,” he said, on the view that the likelihood of a 35% drop was relatively low at least in theory.

“But look at the volatility. And it depends on the timing. In this market, any of those underliers can drop 35%, especially the Nasdaq.”

Best, worst scenarios

Kunhardt examined two extreme outcomes.

“Best-case scenario: you clip your coupons. You’re looking at a little under 1% a month. You could get 5% a year from your money market account with zero risk,” he said.

In the worst-case scenario, one of the underlying – probably the Nasdaq, he said – would drop 35% or more during the life of the notes.

“Now you’re playing catch up and it may take months until you collect anything.”

The issuer call with a short no-call period of three-month was another drawback.

“You’re stuck in this thing for three years but the issuer every month can say: ‘I’m going to call.’ You’re going to either lose your shirt or the issuer is going to call it before the note works out for you. And it doesn’t add any value to the portfolio,” he said.

“I think the issuer is stacking the entire deck on their side.

Barrier risk

A financial adviser said the notes would be difficult to explain to a client and also relatively risky.

“I don’t have data on this ETF. But if you just had the Russell 2000 in there, the probability of being down 35% over a three-year period is only 1.2%, which is pretty small. If you go shorter, over three months, it’s almost impossible. You have a probability of only 1% of missing your coupon. So, on that end, it looks fine,” he said.

But his data, which goes back to 1985, gave very different results on the Nasdaq-100 index.

“It’s a more volatile index and your chances of breaching over a three-year rolling period is 5.5%. That’s much more of a concern to me. I don’t like any probability of breaching over 5% in a note.”

This adviser said other risks had to be evaluated, which he was not equipped to measure.

“You have three underliers and one exposure to the worst of. I don’t know how to account for that kind of risk. I don’t have the mathematical tools to do it,” he said.

Moreover, the structure was too complicated to explain, he added.

“There are a lot of moving parts.”

He said he could understand why.

“We do have a difficult market. Volatility is low. We can’t get the pricing we want. So, you get those bizarre terms – a potential call after three months at the discretion of the issuer, the worst of and so on. It may enhance the coupon. But it doesn’t mean a client is going to like it.”

Red flags

Both the risk of losing money and the complexity of the terms represented “two red flags,” he said.

“The chance of breaching the barrier is too high in my opinion. That’s one issue,” he said.

“The coupon is not bad. But it would be difficult to set expectations for a client simply because a lot is going on.

The main problem an adviser would face would be to explain the product to his clients.

“I don’t think it’s inherently bad or that it’s intentionally complex. But a layman investor will be confused by it.”

The risk of disappointing results had to be considered.

“For me as an adviser, if my clients’ expectations are not met it reflects badly on me.”

This adviser said he has been showing structured notes for years. Today, he still looks at notes on a weekly basis.

“Despite my experience, I have a hard time wrapping my brain around this.”

Limited improvements

Some of the terms could be enhanced, especially regarding the call structure.

“If you had a 14% coupon or an autocall, it may be different.

“Also, if you had a year rather than three months of call protection it would be a lot better. Three months is not worth it. Finding a good note is a lot of work. You don’t want to have to do it all over again in three months.

“You could get a three-month Treasury yielding 5% and not do any work, not take any risk. Now granted 10% is more than that. But there are many things paying a decent return that aren’t complicated, confusing and based on the equity markets.

“There’s just too much going on.”

Barclays is the agent.

The notes will price on Aug. 10 and settle on Aug. 15.

The Cusip number is 06745N4P8.

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