Barclays’ $3.23 million market-linked step-ups on Taiwan Stock Exchange index use rare index

By Emma Trincal

New York, June 24 – Barclays Bank plc’s $3.23 million of 0% market-linked step-up notes due June 25, 2021 linked to the Taiwan Stock Exchange Capitalization Weighted index offer a not-commonly used exposure to a market that many believe is subject to political risk given the current trade war between the world’s two largest economies, sources said.

If the index finishes at or above the step-up level – 148.1% of the initial level – the payout at maturity will be par of $10 plus the gain, according to a 424B2 filing with the Securities and Exchange Commission.

If the index gains by up to the step-up level, the payout will be par plus the step-up payment of 48.1%.

Investors will be exposed to any losses.

Not often seen

As a sole underlier, and not as a basket component, the Taiwan Stock Exchange Capitalization Weighted index has only been used once in a registered U.S. deal before this one, according to data compiled by Prospect News dating back to 2004.

The deal was Goldman Sachs Group, Inc.’s $7.5 million of buffered index-linked notes due Oct. 25, 2016, which priced on April 2015.

Other deals solely linked to a Taiwanese equity index have been priced before, but on the MSCI Taiwan index, a separate benchmark that tracks large and mid-cap segments of the Taiwan market. The Taiwan Stock Exchange Capitalization Weighted is distinct in that it includes all the listed stocks that trade on the Taiwan Stock Exchange.

Five deals have been solely priced on the MSCI Taiwan index, the largest of which was Barclays Bank’s $20.62 million of % Capped Leveraged Index Return Notes due Jan. 25, 2013, which came out on January 2011.

Eksportfinans ASA brought to market a few smaller ones under the $5 million mark.

Political risk

The deal comes at a time when investing in Taiwan, a Chinese neighbor, involves increased political risk as a result of the trade war between the United States and China.

“It’s an interesting play especially if you’re talking to an economist,” said Clemens Kownatzki, an independent currency and options trader who also teaches finance at Pepperdine University.

“While Taiwan is not directly affected by the trade war with China, it is part of the Chinese supply chain.

“If we get a resolution with China this week during the G20, Asian markets would see a boost, and of course, the U.S. equity markets too.

“But if the tensions escalate, Taiwan could be indirectly and negatively affected.”

China is an “assembly plant for the world,” and the Taiwanese economy, known for its strength in semiconductor manufacturing, depends in a large part on its trade with China, he explained.

“Any kind of hiccup through the trade war is going to be difficult for Taiwan because their foreign trade is very sensitive to what happens in China,” he said.

Bullish case

Win Thin, global head of currency strategy at Brown Brothers Harriman & Co., agreed.

“The entire region is suffering. Taiwan, Korea, Singapore, Hong Kong... trade and growth for those countries are all down, due to the trade war,” he said.

On the other hand, the U.S./China trade conflict may be an opportunity for the Taiwanese stock market.

“Big tech firms in the U.S. may decide to move some of their production facilities to other countries like Taiwan, in which case, this country could benefit from the tariff war with China. That would be the bullish bet,” said Kownatzki.

Recent news reports suggested that Apple Inc. is taking steps to shift its production away from China into neighboring countries, including Taiwan.

But Thin downplayed the benefits, saying that no country was likely to win from the trade war in the region.

Even if some countries may be well positioned to grow from the trade war, it is a long shot, said Kownatzki.

“In theory it is possible that Taiwan could see a boost in GDP if the U.S. invests out of China. But we don’t know to which extent big tech companies are willing to move their current infrastructure into those countries, how fast they want to proceed. We don’t really know how flexible they are to recreate a new hub out of China,” he said.

“Even if they did create plants in the region out of China, the whole process would take a while and may not have an impact for years or at least not for the holding period of the notes.”

Protection missing

Kownatzki noted that the step payment of 48% was attractive on two years, especially if the market rises at a slower pace.

That’s because the “return enhancement” of the note is delivered when the index rises up to 45%. Above the step level and below the initial price, investors are merely “long” the index without the dividends.

“Buying this note depends on your view. If you’re moderately bullish to bullish, the note is great,” he said.

“The only problem is that you don’t have any downside protection on a market that’s subject to political risk.

“You’d have to find ways to take care of that risk, for instance you could buy puts. But it could be expensive.”

BofA Merrill Lynch is the agent.

The notes (Cusip: 06747B266) will settle on Tuesday.

The fee is 2%.

© 2015 Prospect News.
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