Barclays’ $6 million step down trigger autocall on three indexes seen as defensive play

By Emma Trincal

New York, Feb. 18 – Barclays Bank plc priced $6 million of 0% step down trigger autocallable notes due Feb. 11, 2025 linked to the least performing of the Russell 2000 index, the Nasdaq-100 index and the S&P 500 index could accommodate a variety of views and investment goals, with a particular appeal to conservative investors given the barrier level, according to financial advisers. Other features such as the call trigger stepping down at maturity and the cumulative call premium may also appeal to income investors looking for above-average yields in a low interest rate environment, they noted.

The notes will be automatically called at par of $10 plus 8% per year if each index closes at or above its call threshold level on any quarterly observation date after one year, according to a 424B2 filing with the Securities and Exchange Commission.

For each index, the call threshold level will be equal to the initial index level for each observation date except the final one, at which point the call threshold level will be the 70% downside threshold.

If the notes are not subject to an automatic call, then the final level of at least one index will be less than its downside threshold, 70% of its initial level, and investors will be exposed to the decline of the least-performing index from its initial level.

Correlations

Michael Kalscheur, financial adviser at Castle Wealth Advisors, said he was comfortable with the three underliers.

“We do some worst of...We don’t mind doing it as long as the terms are good,” he said.

“Usually it’s the S&P and Russell. This one is throwing the Nasdaq in there. It’s going to increase your risk some.

“But correlations are high between those three indices and the terms are good. So we’re not too concerned about it.

“It’s not like having the S&P, the Russell and the FTSE 100. That one would be a killer.”

Upside return

Kalscheur said he was “a little bit disappointed” by the 8% premium.

“I like the memory feature. But I would prefer a double-digit return if I’m going to be taking equity risk. “8% a year, or 2% a quarter, seems a little bit low,” he said.

Limited downside risk

On the other hand, the risk on the downside is contained especially over a five-year time frame, he said.

Kalscheur collects statistical data on the S&P 500 index and the Russell 2000 but not on the Nasdaq-100.

In the past 70 years and over a five-year rolling period, the S&P 500 index has been down more than 30% 0.21% of the time, he said. The frequency for the Russell 2000 index is 0.25%.

“There’s a pretty good chance that you’ll never breach that barrier. I like that 70% level. In fact, I could go for a less defensive barrier in exchange for a higher premium. I would consider an 80% barrier if I could get that double-digit return,” he said.

Autocall

Having the one-year call protection was advantageous for investors who do not want to face reinvestment risk too soon after just three months. After that, the quarterly automatic call feature serves a purpose, he said.

“It keeps you from being stuck. You know you’ll be called if the market is flat or up, and if not, you may be called later and keep the same payout.”

As a result, the note may accommodate a variety of different views, he added.

“If I’m nervous, slightly bearish, there is only a very low chance to be below minus 30% after five years. As long as the worst-of doesn’t fall by more than 30%, I can beat the market,” he said.

“If the market takes off, I’m only stuck for one year and I redeploy my assets.

“If the market goes down, if we even have two bad years, there is enough time for a recovery and I get called out.”

Multiple uses

So, while the return is not as high as this adviser would like it to be, the note offers enough protection, including the call feature, to accommodate more conservative investors.

“If someone wants to be in the equity market but with some kind of a hedge, without taking too much risk, I can see how this note would make sense,” he said.

He also liked the 1.5% fee.

“The cost is so low; that’s why you’re getting good terms. They priced it the right way.”

Kalscheur may modify the risk-return profile slightly toward a riskier investment, but the essence of the structure was compelling, he said.

“I’d rather have a 10% call premium with a 20% barrier, but that’s a personal preference. That’s only because I’d be willing to take a little bit more downside risk.

“But even as it is, this is a pretty good deal for the defensive-minded investors. It’s a nice offering,” he said.

Term, fee

Steve Foldes, vice-chairman at Evensky & Katz / Foldes Financial Wealth Management, also saw in the autocall, call premium with memory and step-down aligned with the barrier level at maturity, a set of attractive terms.

“I like the notes,” he said.

“Normally we do five-year products. But this one has the advantage of the cumulative return. If you miss a call because one of the three indices is not positive on that call date, you can still get paid later.

“You’re also talking about three indices that have a reasonable correlation to one another.

“It’s not like you’re using disparate indices. They’re likely to move in unison in some form or fashion.

“The 30 basis points fee per year is reasonable.”

Step-down feature

Foldes also liked the 70% barrier.

“It would be very unlikely that any of the three indices would be down after five years,” he said.

“And for you to lose money with this note, one of the indices would have to be not just down but down more than 30%. It’s almost unthinkable that any of those three indexes could be down 30% after five years.”

The step-down feature, which allows for the payment of the call premium if the worst-performing index is above the 70% barrier, offers a particular benefit. It can be viewed as a dual directional feature, he said.

“It’s a sweetener. The worst-of is down 29%, you get 40%. That’s a nice way to outperform.

“There’s a lot to like about this note. Getting 8% a year with interest rates as low as they are is pretty attractive.”

UBS Financial Services Inc. and Barclays are the underwriters.

The notes priced on Feb. 7.

The Cusip is 06747F358.

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