BNP Paribas’ autocallable leveraged notes on Russell, Nasdaq introduce novelty

By Emma Trincal

New York, Jan. 28 – BNP Paribas’ autocallable leveraged notes due Feb. 3, 2026 linked to the worst performing of the Russell 2000 index and the Nasdaq-100 index combine different features to price a relatively new type of structure combining leverage with call premium.

The notes will be automatically called at par plus a redemption premium of $1,310 per $1,000 of notes if each underlying index closes at or above 110% of its initial level on an early redemption date expected to be Aug. 3, 2023, according to a term sheet.

If the notes are not called and each index finishes at or above its initial level, the payout at maturity will be par plus 225% of the lesser-performing index return. If the lesser performing index declines but each index finishes at or above its 70% barrier level, the payout will be par. Otherwise, investors will lose 1% for each 1% decline of the least-performing index.

High income

“It’s pretty cool. I like it,” a market participant said.

“We’ve done something similar but shorter. But I like the five-year. It gives you more time to recover if the market drops.”

The 31% call premium offered after two-and-a half year was an attractive double-digit return, he said.

“The reason they did one time call is because they wanted a premium north of 30%.”

The step-up – or the higher call strike at 110% – was another intriguing feature.

“That’s also designed to increase your premium. That’s because you’re less likely to be called,” he said.

Naturally, the use of a worst-of provided additional premium as well.

A different variation

“This one is a little bit different from what we do,” he noted, pointing to the number of calls, the timing of the calls, the call strike and the type of protection at maturity.

“We do it in two different ways: either a single call with a buffer at maturity; or a call after 12 months followed by semiannual calls and a barrier at the end, not a buffer.”

These autocallable notes allowing upside participation if the call outcome fails to occur are relatively new products. Some sellsiders have begun focusing on them more last year, according to data compiled by Prospect News. Those autocallables with leveraged or even one-to-one uncapped participation help investors find a compromise between growth and income.

Barrier type

“When we put a barrier, we typically have multiple call dates, unlike this one. However, we also have the step-up like this one,” he said.

“What I find interesting here is that you only have one call opportunity. Normally, the more call dates you have, the more participation you get on the upside because you’re less likely reach maturity, which makes the option cheaper,” he said.

A single call and the higher call threshold as with the BNP notes on the other hand do just the opposite.

The issuer has less pricing power; therefore, the leverage tends to be lower, he said.

That’s because the call is less likely to be exercised; hence, the odds of benefiting from the leverage is greater, which renders the option more expensive.

“That’s why the 225% participation looks quite good. But keep in mind, it’s not a buffered note,” he said.

The length of time between the pricing date and the first call date is also important in the structuring of those notes.

“I think what’s unique here is the two-and-a-half-year period prior to the call date. That’s a pretty long time to see if you’ll get called. When we do these notes with a barrier, we typically have a call kicking in after one year followed by semi-annual calls,” he said.

Buffered version

But there are several ways to structure these hybrid products. When clients want a buffer, the leverage factor and the frequency of the calls may differ, he explained.

He offered the example.

“We did a deal in December with Goldman. It was similar except – big difference: we had a buffer in it,” he said.

The issue was GS Finance Corp.’s $14.57 million of autocallable buffered index-linked notes due Jan. 24, 2025 linked to the S&P 500 index.

The notes are automatically called at par plus 9% if the index closes at or above the initial index level about one year after issuance.

If the notes are not called and the index return is positive, the payout at maturity will be par plus 1.35 times the return. Investors will receive par if the index falls by up to 20% and will lose 1.25% for each 1% loss beyond 20%.

The third way

“The GS deal is how we do those buffered deals. It’s just a single call. When we do it with a barrier, we use multiple calls with step-ups,” he said.

The BNP notes offered a third variation using the barrier but a single call. In addition, the notes are tied to the worst of two indexes, not one underlying. Compared with the buffered Goldman Sachs deal, the BNP product showed a higher level of leverage, which the issuer was able to price through the use of a less expensive downside protection – a barrier versus a buffer.

The 110% call threshold was set to generate the high yield.

“They give you a higher premium. But you have to be up 10% and you only have one chance to be up 10%. That’s how they can generate it,” he said.

The notes will be guaranteed by BNP Paribas acting through its NY Branch.

BNP Paribas Securities Corp. is the agent.

The notes will price on Friday and settle on Feb. 3.

The Cusip number is 05600MFP4.

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