Barclays’ $1 million income notes on indexes offer unusual terms, but coupon seen as too low

By Emma Trincal

New York, Nov. 15 – Barclays Bank plc’s $1 million of contingent coupon notes due Nov. 13, 2028 linked to the worst performing of the Nasdaq-100 index, the Russell 2000 index and the S&P 500 index combine unusual features. But the coupon does not offer an attractive spread over Treasuries, sources said.

The notes pay a contingent monthly coupon at an annualized rate of 6.5% if each index closes at or above its coupon barrier level, 80% of its initial level, on the related observation date, according to a 424B2 filing with the Securities and Exchange Commission.

Previously unpaid coupons will also be paid.

If the notes are not redeemed early, the payout at maturity will be par plus the final coupon, if any.

Special terms

At first the structure resembles a Phoenix autocallable with the contingent coupon and barrier. The major difference is the non-callable nature of the product, said a financial adviser.

Another unique feature is the full principal protection at maturity, which is not very common with income notes, he added.

Finally, the memory feature, while not unusual, is typically found with callable notes.

Long tenor

The main problem, this adviser said, was the coupon rate.

“They pay you 6.5%. I can get 5.5% with no risk. If I take duration risk and if my coupon is at risk, a risk based on the market, I have to be compensated for that,” he said.

Investors are not protected against default or credit events, he added.

“While I’m not too concerned about Barclays’ credit, it’s still a five-year note and you should be compensated for the credit risk,” he said.

For this adviser, the yield and the long duration were concerning.

“You’re not getting enough premium over Treasuries, and you’re tied up for five years,” he said.

The fact that early redemptions were not available to investors was another issue.

“It’s a bullet note and a five-year note. I’d much rather have a callable note. Interest rates can fluctuate a lot in five years. You’re locked in at a pretty low rate and for way too long,” he said.

Coupon at risk

A market participant agreed.

“You’re getting more than the Treasury rate but not by a lot,” he said.

“While your principal is not at risk, the coupon is. You’ve got three different indices and a tight barrier.

“You’re only getting a small pickup from the five-year Treasury while taking equity risk.

“I’m not sure this deal would be favorably received. The size shows it didn’t do very well.”

Each month, investors may lose their coupon if the worst-performing index drops 20%.

Such risk however is offset by the memory feature allowing noteholders to get previously unpaid coupons once the barrier condition is met.

“To be fair, you’re not going to lose your coupon thanks to the memory feature. Still, in theory, you’re still at risk. You can’t really say that your income stream is guaranteed,” he said.

Effective coupon

The offering carried a 0.6% fee, according to the prospectus.

“It’s a low fee so it looks like it’s a fee-based account. If that’s the case, the end-client still has to pay a 1% advisory fee on their account,” he said.

Fiduciary advisers typically charge a 1% fee on the assets under management.

“If you subtract that 1% from the coupon, your actual effective coupon after the advisory fee is 5.5%, not 6.5%.

“Now your pick-up over Treasuries is only 1%. That’s a very small spread for being exposed to equity risk on a worst-of,” he said.

The five-year Treasury yield closed at 4.5% on Wednesday.

“If the deal was sold to a fee-based account, there’s clearly not enough of a pick-up to justify the risk,” he said.

“If on the other hand, it’s a brokerage deal, it makes a lot more sense.”

Something new

The non-callable aspect of the structure did not change the economics of the notes, he said.

“You’re still looking at a modest spread over the risk-free rate.

“You can get a comparable coupon with a fixed-rate note, a note that’s not equity-linked,” he said.

This market participant, however, acknowledged the originality of the structure combining a bullet format, principal-protection and a contingent coupon with memory.

“I respect Barclays for trying it out. You’ve got to try a bunch of new things.

“But I still think you can get comparable coupons without the equity exposure and without the worst-of,” he said.

Barclays is the agent.

The notes settled on Monday.

The Cusip number is 06745NXX9.

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