Barclays’ buffered digital notes tied to Russell 2000 offer target return alternative to fund

By Emma Trincal

New York, March 4 – Barclays Bank plc’s 0% buffered digital notes due Sept. 28, 2018 linked to the Russell 2000 index allow investors seeking exposure to the small-cap benchmark to get an alternate payout with partial protection and a target return, said Suzi Hampson, structured products analyst with Future Value Consultants.

If the index return is zero or positive, the payout at maturity will be par plus the digital percentage, which is expected to be 17% to 18% and will be set at pricing, according to a 424B2 filing with the Securities and Exchange Commission.

Investors will receive par if the index declines by 15% or less and will lose 1% for every 1% that it declines beyond 15%.

Digitals

More digital notes have been seen in the market, Hampson noted.

“Digital products tend to be less affected by volatility. If volatility is going up, it makes pricing more attractive while some of the growth products are getting more expensive with terms [that] are getting worse,” she said.

“Volatility is not particularly high. ... [W]e’re not seeing huge spikes in volatility. But it has been on the rise pretty consistently, which might be one of the reasons for the increase in digital products.”

One factor behind investor appetite for this structure type – and the benefit this product may offer – is to change the payout structure compared to a direct fund investment, she said.

In particular, investors appear to like preset returns.

“Growth products give you participation. They are similar to funds. Now people are looking for products that can deliver a target return, a digital note like this one or an autocall or other fixed-income product.

“This is a structured product payoff. It’s a lump sum kind of idea. You have set conditions rather than participation.”

Riskmap

Future Value Consultants rates products based on the category of product they belong to. This product is classified as a digital product.

Future Value Consultants assesses the risk associated with a product by adding two risk components, market risk and credit risk. The resulting riskmap measures risk on a scale of zero to 10 with 10 as the highest level of risk possible.

The notes have a 1.98 market riskmap versus an average of 4.57 for the product type.

“We can attribute this very low market riskmap to the existence of a buffer. Digital products tend to have barriers. Some do not even have any downside protection,” she said.

“The 15% buffer is quite sizable. It’s perfectly reasonable to say that it justifies a low market riskmap.”

The credit riskmap is 0.64, compared with an average of 0.56 for similar products.

“Barclays doesn’t stand out with its credit. The slightly higher level of credit risk is probably due to the maturity, not a reflection of Barclays’ creditworthiness. We probably have a term slightly longer than average,” she said.

Risk-adjusted return

Future Value Consultants evaluates the risk-adjusted return of a product with its return score on a scale of zero to 10.

The calculation involves running five different market scenarios and computing the score based on the best market assumption, which would be bullish with this product.

At 7.21, the return score is very close to the 7.24 average for the category.

“We like to see averages in our ratings. You have so many different underlying, maturities, terms. When a product is consistent with the average, it’s a positive sign. It means it’s in line with its peers. For the amount of risk you’re taking, the product is in line with what’s out there. There are no red flags,” she said.

Price score

For each product, Future Value Consultants computes a price score that measures the value to the investor on a scale of zero to 10.

This rating estimates the fees taken per annum. The higher the score, the lower the fees and the greater the value offered to the investor.

The notes have a 7.99 price score while the average for the product type is 5.99.

“We’re two points above average. This is very good. It reflects the value of the assets. A high score suggests that the investment you’re making is giving you high value, which shows with this note,” she said.

“Out of 100, a high portion of that is going to pay for the assets rather than the fees. This is what you want as an investor. The higher the price score, the greater the value.”

Overall score

The overall score measures Future Value Consultants’ general opinion on the quality of a deal. The score is the average of the price score and the return score.

The overall score for the notes is 7.60 versus a 6.61 average score for the product type and a 6.68 average score for all products.

“It’s markedly better than the average compared to both the average of digital products and the average of all product types,” she said.

“This is a product which will perform best in a relatively flat market.

“If you want exposure to this benchmark but are not expecting huge growth, this is a decent alternative to a direct investment in the index. You can outperform the market on the upside, and if the market is down, you will outperform on the downside as well thanks to the buffer.

“You won’t have the liquidity of a fund, but you will get a different payoff, one that may fit your market expectations better.”

Barclays is the agent.

The notes will price March 28 and settle March 31.

The Cusip number is 06741U5U4.

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