Barclays’ $36.04 million of worst-of callables tied to three indexes seen as ‘fairly’ priced

By Emma Trincal

New York, Feb. 14 – Barclays Bank plc’s $36.04 million of contingent income callable securities due Aug. 13, 2020 linked to the least performing of the Russell 2000 index, the S&P 500 index and the Euro Stoxx 50 index may have benefited from the recent spike in volatility to provide a high coupon and attractive entry points, sources said.

The notes will pay a contingent quarterly coupon at an annualized rate of 12.5% if each index closes at or above its 75% downside threshold on any day that quarter, according to a 424B2 filing with the Securities and Exchange Commission.

The notes will be callable at par on any quarterly determination date other than the final date.

The payout at maturity will be par plus the final coupon unless any index finishes below its 75% downside threshold, in which case investors will be fully exposed to the decline of the worst performing index.

Volatility, call option

“When the market is down correlations tend to increase. Correlations are increasing but volatility is rising too. You end up with more value for these options,” a market participant said.

“A 25% protection is a good trade-off.”

The discretionary call along with the use of three underlying indexes rather than two contributed to boosting the coupon.

“The issuer can call anytime. That’s more premium. But again it’s not a bad trade-off because calling is actually a good scenario for investors. You no longer have any put risk. You can achieve a 12.5% annualized rate of return in three months. That’s not bad,” the source said.

More to go

Paul Weisbruch, vice-president of options sales and trading at Street One Financial, said that taking buy-and-hold positions is difficult at this juncture, just a week after the sell-off began.

“I certainly don’t think we’re in the clear. I don’t think the market is structured that way. We just had a three-day rally. Let’s see how it goes,” he said.

At the same time all three underlying indexes are now lower from their respective 52-week highs of Jan. 26, he noted.

Fairly priced

“I’m bearish in the sense that I don’t think we’ll see new highs this year,” he said.

“That said, if the market is trading sideways that’s not bad for this deal. In fact that’s exactly what you need. As long as you trade in a range between -25% and +12.5%, you’re fine. The worst case is a 25% drop. I think it’s a stretch that we would go down that much on any of these three markets.

“It sounds like a fairly priced deal.”

Discounts

While Weisbruch expects more market turbulence ahead, he said that pricing the deal last week, a day after the market entered correction territory, provided a good entry level.

“You got in at a lower price,” he said.

The deal priced on Feb. 9. At its closing level, the S&P 500 index was 8.8% lower than its January high; the Euro Stoxx 50 index, 10% lower and the Russell 2000 index closed at a price 8.25% cheaper than its peak.

Barclays is the agent with Morgan Stanley Wealth Management as a dealer.

The fee is 2.25%.

The Cusip is 06744CVN8.

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