Barclays’ contingent income autocalls on Tesla seen as risky bet on unpredictable stock, CEO

By Emma Trincal

New York, May 12 – Advisers were not impressed by the high contingent coupon of a note tied to a popular and volatile stock given its track record in breaching the barrier established by the issuer. The stock can also generate returns 20 times higher than the coupon in less than a year, which adds some “upside risk” to the mere issue of potential losses.

Barclays Bank plc plans to price contingent income autocallable securities due May 18, 2023 linked to the common shares of Tesla, Inc., according to a 424B2 filing with the Securities and Exchange Commission.

If the shares close at or above the downside threshold level, 50% of the initial share price, on a quarterly determination date, the notes will pay a contingent payment that quarter at an annualized rate of 21.5%.

The notes will be called at par of $10 plus the contingent coupon if the shares close at or above the initial share price on any quarterly determination date other than the final determination date.

If the shares close below the downside threshold level, the payout at maturity will be par plus the final contingent coupon. Otherwise, investors will lose 1% for every 1% that the final share price is less than the initial share price.

Investors are exposed to the downside risk if the barrier breaches. They also face the risk of being capped at a much lower level than the stock performance. The reinvestment risk is another consideration with any autocall. Finally, credit risk comes with the territory of any structured note.

Big drops

Among those four, advisers focused on the downside risk when assessing the performance of the high-flyer.

“This stock has a historical tendency of being down a lot,” a trader said.

“It’s not so hard for Tesla shares to lose half of their value in a short period of time. So, this barrier can easily be breached.”

As an example, the stock plummeted by more than 50% between the summer of 2015 to the beginning of 2016, he noted.

Before that, the price in the fall of 2013 dropped 40% in just one-and-a-half months.

Falling much harder than the rest of the market, Tesla dropped 64% from early February to March 18 during the recent coronavirus-induced bear market. It has more than doubled in price since.

“The chances of a big drop of 50% or more is relatively high. It already happened,” this trader said.

“Right now, it’s going up because the market is up so much. People are chasing returns. Apple, Microsoft are going up too.”

Apple has rebounded by nearly 40% from its March low and Microsoft by a third.

Media

The speed and magnitude of the Tesla rally can only be explained by the fascination Tesla bulls have for the story behind the electric-car company and its charismatic chief executive, Elon Musk, according to this trader.

“The stock got a boost today because the CEO is in the news for reopening his factory in California.”

The stock rose in the morning session on Tuesday before falling along with the rest of the market.

The headline hit on Monday when Musk said in a tweet that he would reopen his San Francisco factory the next day in defiance of local government policies, daring the authorities to arrest him.

“This appetite to be the center of attention is what makes the stock so volatile among other things,” he said.

Sometimes the news put selling pressure on the stock as shareholders react with worry. It was the case when Musk said he had secured funding to take his company private in August 2018. Earlier this month, the CEO made headlines again tweeting that the share price of his company was “too high.”

This trader, who is short the stock, agreed.

Fundamentals

“People who want media attention don’t necessarily make good cars.

“We don’t even know if the company is profitable. Despite its big market cap, Tesla is still not part of the S&P 500 because the company just doesn’t have the track record in earnings.”

To be included in the S&P 500 index, a company must have a history of four quarters of cumulative profits.

“There’ s no way in the world a stock having the earnings that it has could be trading indefinitely at the price that it has,” the trader said.

In addition, Tesla is competing with giant car companies gaining market share in the mass-market electric car space, he said, pointing to General Motors, Ford, Mercedes-Benz and Toyota.

“Tesla is not selling nearly as many cars as GM.

“The stock is almost not a stock. It’s some form of gambling masquerading as a stock,” the trader said.

Impressive rally

Tom Balcom, founder of 1650 Wealth Management, would not go as far but still said the notes were risky.

“Anyone who has Tesla in their portfolio knows how volatile the stock can be,” he said.

“You have to be familiar with the stock and relatively bullish but not too bullish because obviously you can get a much higher return being long the shares.”

The stock can rise more than twenty-fold the annualized contingent coupon in less than a year. For instance, the price skyrocketed by 447% in less than eight months from June to February.

Balcom agreed that the bullish momentum around the stock is in part the result of the magnetic CEO.

“He’s very outspoken. He speaks his mind. He’s not your typical CEO,” he said.

“What drives the stock higher is his personality. He is eccentric and charismatic. People appreciate that he says what he thinks.”

Musk also has a track record as an entrepreneur: he is the founder PayPal and SpaceX, an aerospace manufacturer.

Quality time

While investors do not collect a fixed interest payment, the investment is still an income play given the capped upside and periodic payment potential, said Balcom.

“It’s more of a high-yield play but only for those who like the company,” he said,

With luck, investors may outperform the stock significantly if its price drops near 50% without knocking out the barrier.

“I think a client would be very happy with that.”

On the other hand, any barrier breach would guarantee a loss of at least half of the initial investment.

“It’s not the type of conversation you would want to have with a client.

“Depending on the size of the position, it could either be your last conversation with them, or your first with their attorney.

“I may consider this type of note for myself. But it’s really like going to the casino. I wouldn’t show it to my clients unless they have a high-risk tolerance, like the stock and are familiar with it.”

Another issue was 2% fee for a one-year deal.

“It’s a nice payday for the broker selling this product.

“But it’s a little high, especially if you get called after three months,” he said.

Barclays is the agent. Morgan Stanley Wealth Management is the selected dealer.

The notes will price on May 15.

The Cusip number is 06747H842.

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