Barclays' autocallable notes linked to General Motors to benefit from discounted price, recall

By Emma Trincal

New York, May 7 - Barclays Bank plc's phoenix autocallable notes due May 28, 2015 linked to the common stock of General Motors Co. could offer an attractive risk-reward trade-off now that the company's recall of some of its vehicles in the first quarter has created a buying opportunity for investors with a lot of the downside already priced in, sources said.

Each quarter, the notes will pay a contingent coupon at the rate of 11.65% per year if GM stock closes at or above the barrier, 80% of the initial share price, on the observation date for that quarter, according to an FWP filing with the Securities and Exchange Commission.

The notes will be called at par plus the contingent coupon if GM shares close at or above the initial share price on any quarterly observation date.

If the notes are not called and GM shares finish at or above the barrier, the payout at maturity will be par plus the contingent coupon. Otherwise, investors will be fully exposed to the stock's decline.

The final share price will be the average of the stock's closing share prices on the five trading days ending May 22, 2015.

Catalyst

Paul Weisbruch, vice president of options sales and trading at Street One Financial, said that the recall has been a catalyst for value investors.

During the first quarter, General Motors saw its shares drop by 15% due to a recall resulting from defective ignition switches.

"The timing of this trade is not very surprising given the recall," he said.

The stock year to date is still down 15% while the S&P is up 1.5%, he noted.

"This stock in the short term has had some problems as far as performance," he said.

"There has definitely been a shake out since January when the stock was trading $40.

"On top of that, the company didn't have a strong quarter."

Last month, General Motors reported for its first quarter a $1.3 billion pre-tax charge primarily for the cost of recall-related repairs, according to the company's earnings release.

"Options on the stock are likely to be more expensive because the shares have moved outside of their normal range," he said.

Late bulls

For moderately bullish investors trying to capitalize on the recall, which weakened the share price, the notes may offer a good value with a double-digit potential return and a 20% cushion on the downside.

"This note could appeal to value players who missed out on the stock last year when it traded below $20," he said.

The shares closed at $35.07 (NYSE: GM) on Wednesday.

"These investors know they missed the big run up and that this is not 2008-2009 anymore when the stock was delisted and the company reorganized. Much like Ford, these companies will be around for some time," he said.

The dividend yield on the stock is 3.5%.

"The notes don't offer any participation in the stock price. But if the stock trades sideways, you have the potential for a 12% return versus 3.5%. That's a huge difference. And you also have some downside protection," he said.

The only drawback would be the capped upside, he said, adding that it is a limited risk.

"Missing up on the upside is really a problem if you are very bullish," he said.

"If you believe that the stock will be trading range bound because the recall is already behind GM and a lot of noise is already out, then I think it's a pretty good play."

Short-lived

Jim Delaney, head trader at Market Strategies Management, said the notes offer an attractive income play for short-term investors.

"I like this trade because I think the worst of bad news on GM is out," he said.

"If this paper is issued fairly soon, it would almost seem to me that there's a very good chance that the whole trade would last for only one quarter. That's because the bad news is out. Make it two quarters as we're getting into the summer doldrums. But I don't see this trade [lasting] the year, for sure."

The notes are expected to price Friday and settle May 14, according to the prospectus.

Trending upward

Delaney said the downside risk is limited both by the structure and by market factors.

The structure offers a 20% level of contingent protection observable at maturity, which he said is attractive given today's price, he said.

Moreover, two market trends should prevent the shares from falling further.

"One is a macro factor. The Fed has its hands tied, and they are going to keep rates at zero because despite the recent job report, everyone, including the Fed, knows that employment is still weak and that people are just leaving the workplace. So from a macro standpoint, it gives you an upward bias," he said.

"Now, based on GM itself, the recall clearly has already been factored into the share price. So the stock itself has an upward bias."

Delaney agreed that the risk associated with the notes would be to miss out on potential returns if the share price were to rally above 11.65% in one year.

Income play

"That needs to be taken into consideration," he said.

"But the investor that is looking at this trade is not necessarily looking at an alternative to the stock. They're more interested in income.

"If they were into trading the stock itself, they would buy calls or sell puts or do buy-writes on the stock. They would be that kind of capital gains kind of guy."

A buy-write is an option strategy combining a long position in a stock with the writing of a call on the same position.

Another difference with an equity investor holding the shares for one year is the expected autocall event, which shortens the duration of the trade, he said.

"You're not going to stay invested in this product for very long. If you get called after three months or six months, you get your money back and you have the opportunity to use the cash or find another investment," he said.

"There's a difference between the stated maturity of one year and the realistic duration of the trade. Depending on what your expectation is, you're looking at making at least 200 basis points over what the money market rates are."

Even if the notes are tied to a stock price with investors exposed to the risk of owning equity, investors are more likely to use these autocallables as an income replacement product, he noted.

"Yes, there is upside risk, but this is more like a fixed-income investment. I'm not saying that there's no risk by any stretch, but the type of investor buying those notes would have the mindset of people looking at other types of papers, people who buy short-term corporate paper or high-yield paper. These types of papers would be a more appropriate comparison than the stock," he said.

Barclays is the underwriter with JPMorgan Chase Bank, NA and J.P. Morgan Securities LLC as placement agents.

The Cusip number is 06741UDN1.

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