Barclays’ $16.4 million autocall market-linked step-up notes on Russell can generate alpha

By Emma Trincal

New York, Sept. 29 – Barclays Bank plc’s $16.4 million of 0% autocallable market-linked step-up notes due Sept. 29, 2023 linked to the Russell 2000 index give investors a chance to outperform the market over a short period of time if the notes get called, advisers said. Such outcome is likely to happen in a moderately bullish market, they noted.

The notes will be called at par plus an annual call premium of 12.07% if the index closes at or above its initial level on any annual observation date, according to a 424B2 filing with the Securities and Exchange Commission.

If the index finishes above the step-up level – 135% of the initial level – the payout at maturity will be par of $10 plus the index gain.

If the index gains by up to the step-up level, the payout will be par plus the step-up payment of 35%.

Investors will be fully exposed to any index decline.

Suitability

As always, the quality of the note depends on how suitable it is for the client, said Tom Balcom, founder of 1650 Wealth Management.

“For someone who is modestly bullish, the call feature offers a great opportunity to outperform the index,” he said.

“A bull would not go for it. The best you can achieve is the one-to-one participation minus the dividend. That’s not how you outperform the index.

“On the other end of the spectrum, if the client is scared and risk-averse, this is not the right product because there is no downside protection whatsoever.”

Equity replacement

The combination of a digital return at maturity plus uncapped participation above the step level was attractive, he said.

If you don’t get called, there’s this 35% booster at maturity. And you have no cap if there’s a huge rally.

But the real advantage of the structure versus buying the index fund was the autocallable feature, he noted.

“That’s where the alpha is.

“That’s where the note can be used as long-only replacement. It makes total sense,” he said.

An ideal scenario would be if the market at first plunged and then recovered.

“After two years, it’s flat or slightly up. You get called at 24%. You’re a hero.”

This adviser also liked the tenor.

“Three years is fine with us. We look at notes between two and three years. So, it’s perfect,” he said.

Short duration

A market participant said that an automatic call was the most likely outcome.

“I don’t see the holding period for this note being longer than one year,” he said.

“I’m pretty sure the Russell will be higher in one year, but I don’t know that it will be higher than 12%.

“If you’re going to give me 12% at the end of one year and kick me out, that’s a pretty good deal.

“If the market is up but not more than 12%, you lose the paper, but you beat the market.”

This market participant was not concerned about the lack of downside protection as he does not expect the notes to mature.

Pre-elections stalemate

“I’m not very bullish short term,” this market participant said.

“I think Covid is going to stay with us for at least one year. So, I don’t see strong economic growth looking forward.”

As the stimulus wears off, the economy will be more fragile, he noted.

“Right now, no stimulus package is going to pass before the Elections. The Democrats are upset with the Supreme Court nomination and the two sides disagree on the size of the package.”

Political prospects

After the Elections, he explored several political scenarios, none of which is leading him to be optimistic regarding the economy.

“First scenario: everything stays the same. President Trump is reelected, the Democrats hold the House and the Republicans the Senate. Nothing will happen,” he said.

“Second possibility: Biden is elected but the Dems don’t capture the Senate. The Congress remains split. Then we know that everything else will remain the same because the Republican Senate will block whatever the House wants. Biden might be able to do stuff by executive order but that’s limited.

“The only way you might see a change is if Biden wins and the Dems retake the Senate and keep the House.

“Then you’ll get a pretty big stimulus. But Biden keeps on talking about raising taxes and higher taxes affects small businesses more than it affects larger ones.”

This would adversely impact the Russell 2000, which tracks the performance of small-capitalization stocks.

“The stimulus is helpful. It expands unemployment insurance benefits. But people who need that will use it to buy food and hopefully pay their rent. I don’t know if it’s going to jump start the economy,” he said.

“If my assumption is correct, if the Russell is not going to rise by a whole lot, then getting called after one year with 12% is really not bad.

“You can easily outperform the market.”

BofA Securities, Inc. is the agent.

The notes priced on Sept. 24 and will settle on Thursday.

The Cusip number is 06747K837.

The fee is 2%.

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