Barclays’ $1.3 million callable contingent coupon notes on credit card stocks bet on growth

By Emma Trincal

New York, Oct. 12 – Barclays Bank plc’s $1.3 million of callable contingent coupon notes due Oct. 9, 2024 linked to the worst performing of the common shares of American Express Co., Mastercard Inc. and Visa Inc. offer exposure to highly correlated stocks of credit card companies with strong growth prospects, but valuation should be considered, advisers said.

The notes will pay a contingent quarterly coupon plus any previously unpaid coupons at the annual rate of 9% if each stock closes at or above its coupon barrier, 80% of its initial price on the observation date for that period, according to a 424B2 filing with the Securities and Exchange Commission.

The notes will be callable in whole at par plus any coupon due on any quarterly call date.

If the notes are not redeemed early, the payout at maturity will be par plus any final coupon and any unpaid coupon due if each stock’s final value is greater than or equal to the 50% final barrier level. Otherwise, investors will be fully exposed to the decline of the least performing stock from its initial level.

Fair tradeoff

Tom Balcom, founder of 1650 Wealth Management, liked the risk-adjusted return of the notes.

“The question with those callable income notes is always: are you getting paid enough for the risk? With a 9% annual return and a 50% barrier at maturity, I think the answer to this question is: yes,” he said.

“It’s very unlikely that any of those stocks would be 50% lower in three years. A 20% drop is not very likely either, so you also have a nice coupon barrier.”

In synch

The selection of the stocks of three major credit card companies was also beneficial to investors, he said.

“There’s a high correlation between those three names, and that helps reduce the risk in a worst-of,” he said.

Three-year coefficients of correlations between the three stocks range from 0.8 to 0.94.

Growth

Balcom sees growth ahead for the credit card business.

“I like the underlying. They are established companies. There are more volatile stocks out there which could give you a higher coupon. But credit card companies are resilient. Their business is pretty insulated from the pandemic,” he said.

“When people buy goods on Amazon, they do use their credit cards. And if we have a recession, you still have to buy things. Fewer people are using cash. So, these are companies that are going to do well regardless of the environment.”

Call, fee

The discretionary call could be an issue for investors expecting a certain length of income stream. But Balcom was not concerned by the prospect of an early redemption.

“Assuming they call the notes after three months, you still get 2.25%. That’s much better than the 1.58% annual rate you get from a 10-year bond,” he said.

The initial level of each underlying stock was its closing price on Oct. 1, prior to the initial valuation date of Oct. 5.

“They locked the deal on Oct. 1, prior to the initial date. They just pre-hedged at that point. This is not uncommon,” he explained.

Balcom said he liked the cost of the product, which carries a 1% fee, according to the prospectus.

“It’s a modest fee for a three-year.”

Overall, the note was an appropriate choice for investors looking for income replacement, he said.

“People complain about the very low yields they’re getting on their core bond funds. They worry about interest rates rising.

“They’re forced to find other solutions. This is a good way of doing this,” he said.

Memory

A financial adviser saw in the memory coupon the main value of the structure, which, otherwise, he said, offered no real appeal.

“Certainly, having the cumulative coupons helps. You’re going to have a better chance of getting more payment,” he said.

“The positive correlation between the three stocks is also favorable.

“But I still think the risk is high because these stocks are overpriced although not as much as tech stocks,” he said.

Strong recovery

American Express, Mastercard, and Visa were respectively trading 160%, 80% and 72% higher from their pandemic-induced sell-off levels of March 2020 when the issuer struck the deal.

“The biggest risk is probably the stock of American Express. If you were to touch the low of March 2020 again, the decline would be much more than 50%,” he said.

In March 2020, American Express hit a multi-year low of $67 a share. Revisiting this level from the stocks’ initial price of $173.94 would represent a drop of more than 61%.

Rich P/Es

The price-per-earnings of some of those stocks are elevated, he noted. Visa for instance has a P/E of 52.15.

“You could see those stocks drop in a down market independently of the profitability of the companies,” he said.

“The return you’re getting is not high enough compared to the risk you’re taking.”

This financial adviser said he would feel more comfortable investing in funds of emerging market sovereign bonds.

“Most of those countries have never defaulted. Your only risk really is if the U.S. dollar increases against the local currencies.

“You can get 6% to 7% yields on some of those funds. It’s less than 9% but your risk is much lower,” he said.

Barclays is the agent.

The notes settled on Friday.

The Cusip number is 06741WG95.

© 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.