BNP Paribas’s autocallable leveraged notes on S&P offer alternate payout with premium, growth

By Emma Trincal

New York, Nov. 16 – BNP Paribas’ 0% autocallable leveraged notes due Nov. 30, 2028 linked to the S&P 500 index give investors the potential for a double-digit call premium after two years or uncapped leveraged growth in five years. Advisers debated the respective likelihoods of each outcome based on their own risk assessments and return expectations.

The notes will be called at par plus a call premium of 22% if the index finishes at or above its initial level on Nov. 24, 2025, according to a term sheet.

If the notes are not called, the payout at maturity will be par plus 150% the return of the index.

If the index declines but finishes at or above the 70% barrier level, the payout will be par.

Otherwise, investors will be fully exposed to the index decline.

Longer tenor

Matt Medeiros, president and chief executive of the Institute for Wealth Management, looked at the maturity first.

“I like the fact that it’s a bit longer. Even if it can be called in two years, the effective maturity is five years,” he said.

“That length of time gives me the option to go through an entire investment cycle. It mitigates my risk.”

As a result, Medeiros said he was comfortable with the downside protection.

“I typically prefer a buffer over a barrier. But in this situation, I’m not so concerned about the barrier because of the longer tenor. Statistically speaking, it’s unlikely that the index would be down more than 30% in five years,” he said.

If the notes are called in two years, the duration is not a risk factor since the principal is returned to investors along with the call premium, he noted.

For Medeiros, both return scenarios were satisfactory.

“I don’t have a long-term view on the S&P. But having 1.5x leverage with no cap is very attractive.

“If by chance the note gets called prior to maturity, I believe that 22% over 24 months is acceptable,” he said.

Premium or growth

He then proceeded to compare the two types of payout – a call in two years at 22% or 1.5x uncapped gains in five years with the barrier risk.

“Obviously, you have to be comfortable with both outcomes. But which of the two offers the most attractive potential return?” he said.

The question was “tough” to answer, he said. But back-testing may offer a clue.

“Historically, if you go back over the course of five-year periods, if we did multiple rolling 60-month periods, my presumption is that the leverage + no cap would probably outperform the two-year call premium,” he said.

Catching up

The one-time autocall, however, brought additional uncertainty.

Investors would have to consider the possibility of a shorter period of time to generate growth in the event of a no call.

“If you get to maturity, it’s because the index was negative at the end of year two. Otherwise, the note would have been called, he said.

“I now have three years to generate enough return in order to benefit from the leverage and no-cap at maturity,” he said.

“I think three years is enough.

“In addition, you could be down 1% after two years. It may not necessarily be a big drawdown. A small drop in the index wouldn’t require a big delta to make up for the loss.”

Simplicity

In conclusion, Medeiros said he liked the simplicity of the structure.

“It’s a straightforward note. It’s not overly complex. That to me is important and appealing. You don’t have any of the typical moving parts... the geared buffer, the American barrier, the worst-of.

“You may have two different return outcomes. But it’s not complicated. It’s not like having your return tied to the worst of three indices,” he said.

“I like it.”

A financial adviser held a different view.

“It’s interesting if you expect the market to be flat or up over the next two years. You can get your premium. That’s the welcome result,” he said.

Overvalued market

But the need for the index to rise sufficiently in the course of three years if the notes do not get called was a factor of uncertainty.

“If the market is down at the end of year two, it’s very unlikely that it will be higher than it is now in five years,” he said.

“We’re at the top right now. We are at all-time highs in terms of valuations. The market in five years would have to be more expensive than it is now.

“I don’t think the S&P will be higher in five years than it is now. If the market continues to ignore the deterioration of earnings, it doesn’t make for a good outlook.

“We’re heading toward a market with massive ups and downs a little bit like in the 2000s.”

Bear market

This adviser downplayed the chances of a short-term scenario.

“I don’t see the call happening.

“In two years, we will be in a bear market. The notes are not likely to get called. I see the S&P down more than 40% in two years.”

This adviser said that predicting the direction of the index over a five-year time horizon was “tougher” than over two years.

“If you look back at the beginning of the century, the market crashed between 2000 and 2002 and then rebounded. And yet, it didn’t return to its top until 2013.

“So, I would not assume that the note could be a win despite the leverage and the no cap,” he said.

BNP Paribas Securities Corp. is the agent.

The notes will price on Nov. 27 and settle on Nov. 30.

The Cusip number is 05610PRP2.

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