Barclays’ leveraged notes linked to MSCI EAFE offer exposure to non-U.S. developed markets

By Emma Trincal

New York, June 13 – Barclays Bank plc’s 0% capped leveraged buffered index-linked notes tied to the MSCI EAFE index offer a diversified exposure to developed countries outside of the United States with a mildly bullish, risk-averse outlook, said Tim Mortimer, managing director at Future Value Consultants.

The notes are expected to mature 23 to 25 months after pricing, according to a 424B2 filing with the Securities and Exchange Commission.

If the index return is positive, the payout at maturity will be par plus 1.3 times the index return, subject to a 22.1% to 27.3% cap. The exact cap will be set at pricing.

Investors will receive par if the index falls by up to 12.5% and will lose 1.1429% for every 1% index decline beyond the 12.5% buffer.

Ex-U.S. play

The MSCI EAFE index tracks the equity market performance in developed countries excluding the United States and Canada.

“The product provides a lot of diversification across Europe, Australia, Asia and the Middle East even if the concentration in Europe is important. It’s one of MSCI’s most popular indexes that diversify away from the S&P, the Russell and the Dow,” Mortimer said.

Other choices would involve the MSCI Emerging Markets index, which is more volatile, he noted in reference to MSCI’s other popular global equity indexes.

“This is a play on Europe but also on all developed countries outside of the U.S. for people trying to capture alpha in those markets,” he said.

Buffer and cap

The cap and buffer were set at nearly symmetrical levels, he said.

“The structure offers a 130% upside participation. It has a solid buffer on the downside of 12.5%. It’s rather symmetrical as we find the cap to be 12.25%,” he said.

According to the research firm’s methodology, the hypothetical cap used to score the notes is by definition selected by choosing the value positioned 25% below the upper range.

“You get about 12.5% per year on the upside, best-case scenario, and a 12.5% buffer on the downside. I would say most people would be happy with an annualized return capped at 12.5%,” he said.

In order to evaluate the value of the buffer, Mortimer looked at the implied volatility of the underlying index, which happened to also be 12.5%.

“This buffer appears to be adequate to manage this level of volatility,” he said.

“You would have to compare this buffer with other more-volatile benchmarks, the Euro Stoxx for instance with a volatility closer to 20%. If you saw a 20% buffer on a two-year note tied to the Euro Stoxx, you would consider that a steep buffer. This one can be seen the same way.”

Investors in the notes would not be strongly bullish; their main concern would be to limit the downside risk, he said.

“Investors in this product are looking to allocate to non-U.S. developed countries markets. They want reasonable returns with a 130% participation rate and quite a little bit of protection built in. This is for someone who is moderately bullish and quite risk averse,” he said.

Low risk

The riskmap is Future Value Consultants’ measure on a scale of zero to 10 of the risk associated with a product with 10 as the highest level of risk possible. It is the sum of two risk components: market risk and credit risk.

The notes have a lower market riskmap than the average score for the product category at 2.04 and 2.64, respectively, according to Future Value Consultants’ report.

“This low market risk is due to the low volatility and the buffer,” he said.

The credit riskmap is in line with average at 0.57 versus 0.60.

“The credit risk is unexceptional, just average. It’s due to the creditworthiness of the issuer and also to the fact that the maturity is kept short,” he noted.

Average return score

Future Value Consultants measures the risk-adjusted return with its return score. The rating is calculated using five key market assumptions: neutral assumption, bull and bear markets and high- and low-volatility environments. A risk-adjusted average return for each assumption set is then calculated. The return score is based on the best of the five scenarios.

At 7.62, the return score is in the same ballpark as the rest of leveraged return products, which have an average score of 7.73.

“Our return score reflects the strongest growth in different scenarios. This scenario would be bullish,” he said.

“Because the product is low volatility, in a bull market you wouldn’t expect so much growth. The volatility of this index limits the potential return, which to some degree lowers the probability of a strong performance in a bull scenario.

“This may explain why, in spite of a subdued riskmap, this product scores only average on the return scale.”

Price, overall scores

For each product, Future Value Consultants computes a price score that measures the value to the investor on a scale of zero to 10. This rating estimates the fees taken per annum. The higher the score, the lower the fees and the greater the value offered to the investor.

The 8.45 price score is nearly one point above the average for the same product type, which is 7.58.

“Based on our model, this high price score shows good value and low implied fees,” he said.

“The price score and the return score are a little bit out of line.

“That’s also due to the low-volatility index, which inhibits the return score despite the good value.”

The overall score measures Future Value Consultants’ general opinion on the quality of a deal. The score is the average of the price score and the return score.

The notes have an 8.03 overall score, compared with 7.65 for the average in this structure type.

“This is a straightforward, good value product linked to an index that’s one of investors’ favorite choices when deciding to invest outside of the U.S. The product is quite strong both on the price and return scales,” he said.

The Cusip number is 06741UEK6.

Barclays is the agent.

© 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.