Barclays, BofA price high-yielding notes on S&P providing pure fixed-income solution

By Emma Trincal

New York, Sept. 13 – Advisers looking for yield have many options. As rates have increased, fixed-income notes are becoming more available. Advisers compared two recent guaranteed yield issues, one characterized by a higher coupon with a barrier on the downside and a call option; the other, a bullet note, paying a lower interest rate but with a downside buffer.

Barclays Bank plc’s $7.68 million of 7.8% buffered fixed-coupon notes due Feb. 12, 2024 linked to the S&P 500 index offer a downside protection via a geared buffer of 20% with a 1.25x multiple. Interest is payable monthly, according to a 424B2 filing with the Securities and Exchange Commission.

BofA Finance LLC’s $5.21 million of 9.55% trigger callable yield notes due Dec. 12, 2023 linked to the S&P 500 index feature a 75% barrier at maturity. Interest is payable monthly, according to another 424B2 filing with the SEC.

The notes are callable at par on any coupon payment date after three months.

The payout at maturity will be par of $10 unless the index finishes below its 75% downside threshold level, in which case investors will lose 1% for each 1% decline of the index.

Income solutions

Ken Nuttall, chief investment officer at BlackDiamond Wealth, said there are a variety of ways to generate higher coupons.

“9.55% is a pretty high coupon. You’re getting compensated for the risk. We’ve done a few similar deals with guaranteed coupons,” he said.

When looking for income, short-dated autocallables with a step-up call threshold, allowing for higher coupons, was a structure Nuttall said he found interesting.

The easiest way to increase the yield however is to allow for the contingency of the coupon.

He said he recently purchased a 21-month note tied to the worst of the Dow Jones industrial average, the Nasdaq-100 index and the Russell 2000 index paying a 13.8% contingent coupon with buffer.

“I actually like worst-of. You can get much better terms,” he said.

High-yield replacement

Advisers when showing income notes to their clients need to clearly explain the risk.

“We see them as high-yield substitutes. This is not a T-bill. That’s why we don’t put a ton of it in our clients’ portfolios,” he said.

“A high-yield bond right now will yield 6% give or take.

“You’re getting a little bit more with the structured notes due to the equity risk. And your credit risk is there but much lower than with a high-yield issuer.”

Short-dated

Tom Balcom, founder of 1650 Wealth Management, said that with rates rising, getting fixed rates that exceed Treasury yields is an attractive proposal.

“Both notes are income plays,” he said.

“You have to explain to the client that it’s not the risk-free rate. The two-year Treasury yields 3.75%. They get a generous spread over Treasuries for taking the equity risk.”

Both notes are short-dated products – 17 months for the Barclays deal and 15 months for the BofA securities, he added.

“There’s not a huge difference in duration between the two, except that the BofA deal is callable.

“To me the choice is really between a barrier with a higher yield or a buffer with a lower coupon. There’s almost a 2% difference in coupons between the two,” he said.

Barrier tolerance

For Balcom, the barrier note offered the best tradeoff.

“I would choose the one with the 9.55% coupon. It’s a barrier note, but at current market levels, the risk is limited.

“The market is down. The S&P is down 17.5% for the year. You have a nice cushion. If we were at all-time highs, you would want more protection. But here you have a nice built-in buffer,” he said.

“I also always prefer the larger amount of protection.”

Balcom was relatively confident that the 25% contingent protection would be sufficient given the current pullback.

The risk of a recession hitting when the notes mature was his main concern.

“That’s a risk. We have an inverted curve, a slowing economy, high inflation. The Fed may be forced to raise rates too aggressively and that could hurt economic growth,” he said.

An attractive alternative for yield-seekers is the I Bonds issued by the Treasury, which currently offer a 9.62% yield, he said.

“I Bonds are very interesting. They pay close to 10% and They’re backed by the U.S. government.

“But they’re limited to $10,000 per individual. You can use an income note as a way to go over that $10,000 cap.”

Barclays is the agent for the Barclays offering.

The notes (Cusip: 06748XS85) settled on Monday.

The fee is 0%.

UBS Financial Services Inc. and BofA Securities, Inc. are the agents for the BofA Finance notes.

The notes (Cusip: 09710H104) settled on Monday.

The fee is 1%.

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