Barclays’ $45.6 million contingent income notes on indexes show interest for issuer calls

By Emma Trincal

New York, June 24 – Barclays Bank plc’s $45.59 million of contingent income callable securities due June 23, 2022 linked to the least performing of the Dow Jones industrial average, the S&P 500 index and the Russell 2000 index suggest from the deal’s size that investors may become more prone to embrace discretionary calls as issuers are scrambling to find additional sources of premium in a rising market.

Each quarter, the notes pay a contingent coupon at the rate of 15% per year if each index closes at or above its coupon barrier, 70% of its initial level, on every day that quarter, according to a 424B2 filing with the Securities and Exchange Commission.

The notes are callable at par on any quarterly coupon payment date other than the final one.

If each index finishes at or above its downside threshold level, 65% of its initial level, the payout at maturity will be par.

Otherwise, investors will be fully exposed to decline of the least-performing index from its initial level.

Unusual popularity

The size of this deal was surprising for a note featuring a discretionary call. Even autocallables tend to be smaller in size, sources said.

“The basic investor doesn’t like callable notes,” a financial adviser said.

“They prefer to know under what conditions the notes will get called. There is too much uncertainty around the parameters of an issuer call. You don’t really know why or when it’s going to happen.”

A broker agreed.

“In my opinion issuer calls are not in high demand because the call already includes an element of unpredictability. It becomes much harder to have that conversation with a client while with autocalls, advisors can better articulate what the product is,” he said.

A new trend, maybe

And yet, some predict that traditional callability at the discretion of the issuer may be gaining traction. With Barclays’ $45.59 million deal, the coupon size may have something to do with it.

The issuer call carries two advantages for investors and advisers alike, explained a market participant.

First, it can extend the time between issuance and the first call date in a rising market.

“One of the hidden advantages of an issuer call is that you may not be called as early as an autocall,” he said.

“In this run up, autocalls get called in three months and advisers have cash in their hands they don’t know what to do with. The market is too high.

“When it’s a discretionary call, the issuer may or may not call. It doesn’t automatically flush the adviser with cash.”

Most of the autocallable notes issued in March have been or are about to be called this month, he said.

“Sometimes, you have six months. It gives you a little bit more time. But not all autocalls have a six-month call protection.

“I know that in the agency market, people are pushing for longer no-call periods. They don’t want three months. They want one year.

“Obviously, you don’t see that with structured notes. But six-month for a quarterly autocall note is what advisers tend to like best.”

Yield enhancement

Discretionary calls benefit investors in a second way: the feature can significantly raise the coupon.

If the underlying performs in accordance with the conditions of payment of the coupon, the issuer is likely to call.

“When you have the ability to call at par a bond that’s worth 102 or 101, you do it,” said a sellsider.

If on the contrary, the underlying trades below the coupon barrier, the issuer is less likely to call. Investors have no way to predict the timing or occurrence of a discretionary call.

“It’s to the advantage of the issuer to be able to call when they want. So, they have to pay you for that. It doesn’t mean they’re going to call right away,” said the market participant.

“Perhaps they’re not ready to call. Perhaps they’re waiting for the market to turn around. If stock prices go down, the issuer has the upper hand. They’re more likely to call. But that can take longer than three months, which gives investors less exposure to reinvestment risk.

“So, you get a higher yield and perhaps a greater probability to hold the notes longer.”

Another big one

The market participant said the terms of the notes were attractive.

“The 70% barrier is good but that’s what’s out there. We see 75%, 70% barriers,” he said.

“But the 15% contingent coupon is pretty high.”

Three days before, Barclays priced another large contingent income callable note deal for $37.5 million with an even higher coupon. The structure, tenor and underlying indexes were the same. The contingent coupon payable quarterly based on a 70% coupon barrier was set at 17.75% per year. The 70% barrier at maturity was slightly less defensive than the 65% level offered in the other offering.

Morgan Stanley Wealth Management is the dealer for both offerings.

The $45.59 million deal priced June 19.

The Cusip number is 06747PZZ5.

The $37.5 million offering priced June 16.

The Cusip number is 06747Q2K2.

The fee is 2% on both deals.

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