Barclays’ $1.3 million callable contingent coupon notes on Russell, Nasdaq offer rare buffer

By Emma Trincal

New York, Aug. 11 – Barclays Bank plc’s $1.3 million of buffered callable contingent coupon notes due Aug. 7, 2025 linked to the lesser performing of the Russell 2000 index and the Nasdaq-100 index present an unusual feature, an adviser said, pointing to the buffer at maturity. Most callable income products provide a barrier at maturity for the purpose of principal repayment. Buffers remain the exception, according to data compiled by Prospect News.

The notes pay a contingent monthly coupon at an annualized rate of 13.15% if each index closes at or above its coupon barrier level, 80% of its initial level, on the observation date for that period, according to a 424B2 filing with the Securities and Exchange Commission.

The notes will be callable in whole at par plus any coupon otherwise due on any quarterly observation date after one year.

If each index finishes at or above its barrier level, 80% of its initial level, the payout at maturity will be par plus the final coupon. Otherwise, investors will lose 1.25% for each 1% decline of the least-performing index beyond the 20% buffer.

Buffer, high coupon

“Most of the autocalls we’ve done are barrier notes. I don’t think I’ve seen any of these with a buffer. That makes it kind of neat because we use those notes as part of a fixed-income portfolio,” said Steve Doucette, financial adviser at Proctor Financial.

“The 13% coupon with a 20% buffer, even if it’s a geared buffer, that’s a great risk-reward on a three year,” he added.

The frequency of payments and the issuer call however were more debatable.

Call features

“The big question here is: are you going to get the full 13% a year for three years? It’s more likely that they’re going to get called although you don’t know with an issuer call,” he said.

“You are at their mercy. Sometimes they call, sometimes they don’t. I’ve seen cases when the market is up, and they don’t call. You never know. With an autocall, you know in advance what’s going to happen based on what the market is doing.”

But the one-year call protection offset some of the uncertainty.

“At least here, there is potential for collecting the full 13% in the first year,” he said.

Doucette said that part of his routine when negotiating terms with an issuer was to get a minimum of call protection.

“We always ask for at least six months and possibly one-year no-call. We don’t want to constantly be rolling those things,” he said.

Entry prices

The use of the Nasdaq-100 and the Russell 2000 added some risk given the respective volatility of the indexes and their relatively low correlation to one another compared to other pairs of U.S. equity indexes. But the entry prices were attractive, he said.

Both the Nasdaq-100 and the Russell 2000 are about 20% off their highs of November, he added.

“They’re still way down, so your entry point is decent,” he said.

Memory, coupon barrier

Doucette however said he may try to improve the structure in two ways.

“I like to have cumulative coupons, so you don’t really lose anything after a pullback. That’s one of the things I would try to change in this note and see what it cost. Because you could be riding a down market for two years and miss two-thirds of your return,” he said.

Secondly, the size of the coupon barrier should probably be increased, he said.

“I might want to lower the 80% level a bit and see how much it would cost in interest. Obviously, I wouldn’t get a 13% coupon. But I’d be curious to find out how much of the return I would lose for that.”

Overall, Doucette had a positive opinion on the product.

“The buffer and the coupon make this note pretty interesting, especially the buffer. It’s really rare to have a buffer in a callable note or an autocall. I kind of like this note mostly because of that,” he said.

Cumulative payments

Matt Medeiros, president and chief executive of the Institute for Wealth Management, did not have such a positive view on the notes.

His first objection was also the lack of any memory feature for the coupon.

“If I do get called, I may get the coupon for that month, but I may have skipped a number of previous months where the index was below the barrier. So, I really don’t know what my return is,” he said.

He stressed the difference between the note and a snowball.

“I prefer these autocalls where you get called at par plus a coupon when you’re up. If the annual coupon is 12% and you get called in six months, you pocket 6%. It’s attractive and easy to understand. I know what I’m going to get. I never miss a payment,” he said.

Issuer call, geared buffer

Having an issuer call instead of an autocall was another drawback, he said.

“With those callable notes, I don’t know if, when or why I get called. If I get called, there is no assurance of any return. This makes it particularly difficult to model my risk and my return expectations,” he said.

Medeiros added that he did not even like the buffer because of the gearing.

“If you exceed the buffer, your losses accelerate because of the leverage, which I find very unattractive. It’s another layer of complexity and risk.

“There are too many moving parts in this product, which make the assessment of your return extremely complicated.

“I’m not a fan of this note,” he said.

Barclays is the agent.

The notes settled on Monday.

The Cusip number is 06748XLV1.

The fee is 0.1%.

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