BNP Paribas’ autocallable leveraged notes on Russell, Nasdaq offer two ways to gain

By Emma Trincal

New York, March 10 – BNP Paribas’ autocallable leveraged notes due April 6, 2026 linked to the worst performing of the Nasdaq 100 index and the Russell 2000 index are structured to outperform both in a flat and vigorous bull market, sources said.

The notes will be automatically called at par plus a redemption premium of 34% if each underlying index closes at or above 110% of its initial level on the early redemption valuation date, which is expected to be Oct. 3, 2023, according to a term sheet.

If the notes are not called and each index finishes at or above its barrier level, 70% of the initial level, the payout at maturity will be par plus 2.4 times the return of the lesser performing index, subject to a floor of par.

If the lesser performing index finishes below its 70% barrier level, investors will lose 1% for each 1% decline of the lesser performing index.

Two ways to profit

The upside presents two different outcomes, each of which matching different market outlooks, sources said.

The first is an automatic call after two and a half years if the underlying worst-of is up at least up 10% giving investors a 34% redemption premium, which is the equivalent of 13.6% per annum with no downside risk.

The second possible result is unlimited enhanced return with contingent downside protection of up to 30%.

“Your favorite outcome will depend on your view on the market and the level of acceptable risk for you,” said Matt Rosenberg, director at Halo Investing.

“Personally, I prefer the call. I tend to look for certainty and locking in 13.6% in annualized return as a redemption premium is pretty decent in my eyes.”

Having the length of the holding period cut in half was also attractive, he added.

Compounding gains

“Now I totally understand someone would want to buy the notes for the uncapped leveraged return at maturity. In fact, I would too. But it’s less likely to happen and you have downside risk exposure,” he said.

The structure however is appealing compared to similar autocallable leveraged products, in that it leaves investors enough time between the redemption and the maturity dates to compound positive returns if the notes are not called.

Similar deals have been seen with shorter maturities offering only six months to a year after the failed call for the underlying to compound enough growth at maturity to make the leverage relevant.

Another particularity of the BNP structure is the 110% call threshold, which gives the issuer more pricing power as it slightly limits the odds of the early redemption.

“BNP could not have offered 2.5x uncapped without the call feature and setting it at 110% definitely helps pricing,” said Rosenberg.

Tiptoeing back

Because both scenarios may happen, the note is a “compelling story” for advisers, he added.

“If you think we’ll have a sideways market, 10% growth over two-and-a-half years isn’t much,” he said.

The index only has to be up 4% a year for the call to be triggered, he noted.

“If you’re a risk-averse investor, instead of sitting on the sidelines, you can use this note to position yourself for a more normalized economy. It’s a good way to tiptoe back into the market.”

The call scenario is the most likely result, he said. But bullish investors will undoubtedly be excited with the magnified and unlimited gains at maturity if both indexes finish up.

“If you don’t get called at mid-term and the market recovers later, you’ll more than double up your return and be quite happy with it,” he said.

“There is the downside risk, but the longer the term, the more volatility smooths out. Most people if they’re bullish would prefer the 2.4x growth over five years with the 30% barrier.

“If on the other hand, you expect a range bound market, the call is what’s best for you, but it comes with its own limits. What if on the call date the index is up not just 10% but 100%? You have to be prepared for the opportunity cost.

“Both scenarios though are compelling stories.”

Uncapped leverage

A financial adviser said he liked the two possible ways to make money out of the notes, although he would prefer skipping the call.

“It’s so difficult to find leveraged return notes with no cap nowadays even over five years,” he said.

“2.4 times is amazing. There is no cap, and you have a barrier. This is the ideal growth product.”

Unfortunately for bulls, investors are more likely to get the 34% premium midterm instead.

“That’s not bad, but you may not outperform since the market already has to be up 10%,” he said.

The underlier’s positive return would have to be close to 10% to give investors the maximum level of outperformance, he noted.

“You’re ahead of the index in a flat market. If the market is up 10%, you outperform by 24%. But anywhere above 34% you underperform. And this is without taking into account the non-payment of dividends,” he said.

“It’s still a nice return, but getting the high leverage at maturity is a much better thing. Unfortunately, what you want is not always what’s the most likely to happen. That’s how it works.”

Before considering the notes, investors should have a clear market outlook in mind, he said. The note offers different versions of potential returns depending on whether the market is bullish or range bound, he said.

“It may be attractive for bulls, but you’re more likely to benefit from it if your return expectations are modest,” he said.

The notes will be guaranteed by BNP Paribas acting through its New York Branch.

BNP Paribas Securities Corp. is the agent.

The notes will price on March 31 and settle on April 5.

The Cusip number is 05600MQD9.

© 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.