Barclays’ $46.3 million callable notes with daily observation offer eye-catching yield

By Emma Trincal

New York, Sept. 19 – Barclays Bank plc’s $46.3 million of trigger callable contingent yield notes with daily coupon observation due March 17, 2026 linked to the worst performing of the Nasdaq-100 index, the Russell 2000 index and the S&P 500 index offer a very competitive coupon for an index-linked note, advisers said. The combination of a worst-of payout based on three indexes, a coupon barrier observed daily, and a discretionary call contributed to the exceptional rate of return, they said.

The notes will pay a contingent quarterly coupon at an annual rate of 16% if each index’s closing level is at least 70% of its initial level on every trading day during the observation period, according to a 424B2 filing with the Securities and Exchange Commission.

The notes are callable at par plus any coupon otherwise due on any quarterly observation date.

If the notes have not been called and each index finishes at or above its 70% coupon barrier, the payout at maturity will be par plus any final coupon otherwise due.

If the worst performer finishes below its coupon barrier but at or above its 60% knock-in level, the payout will be par. Otherwise, investors will lose 1% for every 1% that the worst performer finishes below its initial level.

Worst-of

Scott Cramer, president of Cramer & Rauchegger, Inc., said he generally avoids worst-of payouts.

“I don’t like worst-of because anything can happen. If one index is melting down, the whole thing is going to go down. Anything happens to a particular sector and one of the indices could be doing really poorly,” he said.

Daily observation

The daily observation barrier put more risk on the coupon but also provided more premium.

“You’re getting such a high coupon... you can ride out the bumpy income. Even if you only get one or two quarters it’s still a reasonable return,” he said.

“It’s a daily observation barrier but that’s for the barrier on the income only. You still have the 40% protection on the back end.”

Issuer call

Investors should not buy the note in the hope of getting paid for the entire three-and-a-half years, he added.

“If you don’t breach due to growth, the issuer will have to call it,” he said.

“If the market rallies, they won’t have enough money to pay for the coupon. They are not going to want to hold it and carry the risk to the end.”

But if the notes are not called, the market risk should be somewhat limited, he said.

“Three-and-a-half year seems relatively safe especially with the 60% point-to-point barrier at maturity,” he said.

High coupon

Investors also benefit from some additional protection coming from the paid coupons during the life of the note, which can provide the equivalent of a cushion.

“Even if you don’t get the coupon a few times, the interest rate is high enough to mitigate some of the risk,” he said.

Despite the advantages of the product, especially the high coupon, Cramer said he would not consider purchasing the notes for his clients.

“There are a lot of moving parts – too many moving parts,” he said.

His preference would be for a more conventional income-oriented product.

“You can find something more stable, something that may not give you as much income but a steadier source of income,” he said.

No risk in a call

Jerry Verseput, president of Veripax Wealth Management, said the high coupon offset some of the negative aspects of the notes, including the risk associated with the daily observation barrier. The issuer call was an element of uncertainty but not a risk factor, he noted.

“This 16% coupon is incredible,” he said.

“Yes, the issuer can call it as early as December. So what? You make 4% a quarter. That’s still 16%,” he said.

“I’ll take it as long as I can get it.

“I never see the issuer call as a risk. You’ll always get a higher coupon with an issuer call than with an autocall. If I can grab it for a little while, I will.”

Verseput also liked the 60% principal repayment barrier although he said he expected the notes would be called before maturity.

Put writing

Among the factors that may trigger a call, Verseput stated a rising stock market.

“The bank pays you those coupons by selling puts around the barrier. If the market goes down, it’s not a big deal for them, their position is hedged, and they don’t pay you the coupon. But if it goes up, they no longer have enough premium to pay you. They have to keep their cost similar to what they would pay you on a regular bond. Anything above that, they have to generate it by selling puts. If they can’t get enough put premium to pay you above that minimum cost, they have no choice but to call the notes,” he said.

As investors buy puts to protect themselves against falling stock prices, their cost (premium) tends to rise in a down market. Inversely and all things being equal, a market rally will tend to lower the value of a put sold to a buyer.

“If the market is up, they can’t pay you 16%. That’s why they need to have that call option. Most of those high-coupon notes are callable. Without the issuer call, you wouldn’t get 16%. It would be more like 8%,” he said.

Pure income play

The daily observation for the coupon barrier was also used to boost the coupon, he said.

“You might miss one coupon, but you still have a 12% note,” he said.

“The barrier makes it less attractive, but it doesn’t make it unattractive.”

Finally, the 70% barrier level for the coupon was “reasonable” given how much the market has already declined this year.

“It’s a good note. I like it. A greater number of my clients are looking for growth, not so much income, but if your goal is income, it’s a very attractive note,” he said.

UBS Financial Services Inc. and Barclays Capital Inc. are the agents.

The notes settled on Friday.

The Cusip number is 06748C404.

The fee is 1%.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.