Barclays’ $5.76 million autocallable dual directionals on SPDR S&P may fit wide range of views

By Emma Trincal

New York, Feb. 9 – Barclays Bank plc’s $5.76 million of 0% autocallable buffered dual directional notes due Feb. 6, 2025 linked to the SPDR S&P 500 ETF trust may appear strictly bearish given an attractive payout and cap on the downside. But the possible unlimited gain if the index is up as well as fixed return in a flattish market widen the scope of potential bidders.

The notes will be called automatically at par plus an 8% call premium if the ETF closes at or above its initial level on Feb. 5, 2024, according to a 424B2 filed with the Securities and Exchange Commission.

The payout at maturity will be par plus any gain in the ETF.

If the ETF falls by up to 25%, the payout will be par plus the absolute value of the return.

Otherwise, investors will lose 1% for every 1% decline of the ETF beyond 25%.

Negative outlook

“This is very bearish – too bearish. You can get up to 25% on the downside. On the upside, you’re likely to get called at 8%,” said Steve Doucette, financial adviser at Proctor Financial.

“This 8% call premium looks like a cap to me.”

He compared the notes to a $1.5 million offering of autocalls recently brought to market by the same issuer and paying an even lower coupon.

Those notes pay a monthly contingent coupon of 7.25% per annum based on a 50% barrier. The underlying is the worst of the Nasdaq-100 index, the Russell 2000 index and the S&P 500 index. The notes can be called on any monthly call date if the worst-of is at or above initial price. The barrier is 50% at maturity.

“It’s not my type of note either. But if you’re that bearish, it makes sense in a way. It’s got an even lower coupon and it’s a worst-of. But at least you can be paid even if the index is down 50%. And if you happen to stay in the market, that 50% barrier is very steep. It’s worth more than a 25% buffer,” he said.

8% cap

Doucette’s main objection to the SPDR S&P ETF deal was the high likelihood to see the notes called after a year at 8%.

“The S&P is already down over the last 12 months. It could be down more. Could you get called in one year? Absolutely.

“If you’re even slightly bullish, you really have to believe that the market won’t be up by more than 8% in a year; otherwise, you’ll underperform.

“I expect a bigger move on the upside,” he said.

Another example of the over-bearishness of the notes was the downside protection at maturity.

“One year out, you could be down. But two years from now? I doubt it,” he said.

The compelling payout was on the downside.

“The buffer and absolute return are the only way you can beat the market. If you’re a total bear, that’s the only attractive feature of the note. Personally, I don’t need that much buffer,” he said. “I’d rather get more on the upside.”

Stretching up

The potential for positive return in a rising market was two-fold: either the 8% call premium after one year, or the unlimited one-to-one gain if the notes mature.

“I would try first to raise that call premium from 8% to 10% or 12% if I can. I would give up some of the buffer and possibly the absolute return. A 10% buffer would be fine with me,” he said.

“By cutting the buffer, I’d see if I have enough room to add some leverage as well.”

The way the notes are designed would fit a very limited view on the market, he said.

“If you think the market will be down, you won’t get called and you could get some very good outperformance on the downside. If the index is down 25% you make 25%. In theory you could outperform by 50%.

“But that doesn’t get me excited. I have a hard time being in that bearish mindset.

“I would try to catch some upside instead,” he said.

Optimistic, yet cautious

Matt Medeiros, president and chief executive at the Institute for Wealth Management, said he liked the defensive profile of the structure.

“I wouldn’t say it’s bearish,” he said.

“8% is interesting even though we had some good news on the economic front. I still don’t think it’s time to give up some downside protection when you choose a note. I like the terms here, especially the 25% buffer,” he said.

The note was not bearish because it allowed investors to obtain a “nice premium” if the notes were called, and if not, the positive return at maturity was uncapped.

“When we look at a note, we try to match our view with the terms. Here we do like the asset class. We think the market has improved. But there are still many uncertainties. We see ourselves as optimistic but not completely bullish,” he said.

The potential to outperform on the downside was the most compelling aspect of the product.

“25% is a wonderful downside protection especially when it’s offered via a real buffer,” he said.

“We think that type of protection is necessary because the economy is still in a fragile position and susceptible to negative surprises.”

By “surprises,” he meant a potential rise in inflation, a recession or some currencies issues.

“There’s a handful of potential headwinds.

“This is why combining this buffer with the absolute return is very attractive,” he said.

Barclays is the agent.

The notes settled on Wednesday.

The Cusip number is 06749NM74.

The fee is 0.7%.

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