Barclays’ autocalls on basket of bank stocks offer high premium on concentrated bet

By Emma Trincal

New York, June 7 – Barclays Bank plc’s $10.06 million of autocallable market-linked step-up notes due June 3, 2024, linked to a basket of bank stocks pay an attractive return to investors who believe the sector will continue to rally but at a more modest pace.

The basket consists of the common stocks of Goldman Sachs Group, Inc., JPMorgan Chase & Co. and Morgan Stanley, each with a weight of 33.33%, according to a 424B2 filing with the Securities and Exchange Commission.

The notes will be called at par of $10 plus a call premium of 11% a year if the basket closes at or above its initial level on any annual call date.

If the notes are not called and the basket finishes above the step-up value, 145% of the initial level, the payout at maturity will be par plus the basket gain.

If the basket finishes at or below the step-up level but at or above the initial level, the payout will be par plus the step-up return of 45%.

Investors will lose 1% for every 1% basket decline.

Compelling premium

“You get paid 11% on this package of bank stocks.... I think it’s a terrific security. It’s very attractive,” said Dick Bove, chief financial strategist at Odeon Capital.

“If I hold it to maturity, I get the full upside. I can collect 11% a year on the first two years and on the third, they raise the return to 45% as long as the basket is not negative. That’s a great opportunity.”

Investors do not receive dividends. As a result, if the basket returns more than the 145% step-up value the payout would not be exactly equivalent to a long position since the note would underperform the basket by the dividend amount. For Bove, this was not a concern.

“I don’t get the dividends. It’s fine. If I get 11% or 45% after three years, what do I care?

“If I bought a bank preferred, I would get much less, somewhere around 3%,” he said.

Another deal

Separately Barclays sold a second offering for $16.35 million showing the same structure and underlying basket but with slightly different terms. The notes, which are due June 1, 2026, are two years longer. The call premium and step-up value are lower at 6.8% and 135%, respectively. One key difference however is a 15% buffer.

“Since I’m bullish, I’d take the one with the 11% premium. I don’t see any of those stocks going down in three years,” said Bove.

“If you assume – and I do – that the economy will expand, then the loan volume will increase and that’s how banks make their money. Interest rates will go up. Therefore, banks will have bigger margins. Loan losses will go down because people will be able to make their payments.”

From his bullish perspective, Bove would not need the 15% buffer. Instead, he would opt for the higher premium and step-up.

“11% is a big return in this market,” he said.

“If you’re more bullish, then you go buy the stocks.”

Tradeoff

A financial adviser compared the two deals, also leaning toward the one with the higher premium.

“It’s a three-year, which is not bad. 11%. I like that. If you’re going to take equity-type risk, you should have the opportunity to get equity-type returns.

“The numbers look better whether it’s the 11% premium or the 45% digital at the end. Well, you should have better terms if you don’t have the downside protection. So that makes sense. If you put a buffer on a note, you have to pay for it. The buffered note is not going to give you an exciting premium.

“It’s not like a note is good and the other is bad. It’s really what you prefer.

“In general, I believe that most people buy structured notes for the protection. But in this case, I wouldn’t want to pass a good opportunity.

First call outcome

“The 11% call premium is really appealing, especially considering the most likely scenario, which is that you’re going to be called out in year one.”

While statistically a call on the first date is always the most probable scenario, it would be hard to quantify the probabilities when the underlying is a basket of stocks and not of indexes, he said.

“What are the odds of a call after one year? I have no idea.

“These are three equally weighted bank stocks. Any of them could do exceptionally well, just like any of them could do extremely poorly. One stock alone could have an enormous impact on the basket.”

High returns

This adviser looked at a chart and noticed that the three stocks have significantly appreciated.

“Goldman’s share price has more than doubled since November,” he said.

“Same thing for Morgan Stanley since a year ago.”

JPMorgan’s stock has gained 82% since its low of July.

“You could argue that the stocks having gone up so much they are likely to rise only moderately, in which case the structure is perfect. But I don’t want to make that kind of bet. The stocks could go down just as well,” he said.

Broad indexes preferred

This adviser said he was not familiar with the stocks. The notes he routinely buys are linked to indexes.

“For me to go to a client and tell them with assurance – hey, let’s bet on those three bank stocks – requires more in-depth knowledge than I have.”

Another issue was the concentration of the basket.

“It’s only three stocks. All three are in the financial sector and they’re all bank stocks.

“That’s a super-concentrated bet.

“I would have to take a pass at this.”

BofA Securities, Inc. is the agent for both deals.

Each note carries a 2% fee.

The Cusip number for the three-year note with an 11% call premium is 06747T788.

The Cusip number for the other note is 06747T622.

Both offerings settled on Friday.

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