Advisers want to see bigger buffer on Barclays’ digital plus notes tied to Russell 2000

By Emma Trincal

New York, July 20 – Barclays Bank plc’s 0% buffered digital plus notes due July 29, 2022 linked to the Russell 2000 index offer potential for gains in a slightly down market. But advisers said they would prefer to see a larger buffer whether it is because of the long holding period or the uneasiness around Washington.

If the index return is at least negative 15%, the payout at maturity will be par plus the greater of the digital return and the index return, capped at 50%, according to a 424B2 filed with the Securities and Exchange Commission.

The digital return will be between 23% and 25% and will be set at pricing.

If the index return is less than negative 15%, investors will lose 1% for every 1% decline beyond 15%.

More protection

Matt Medeiros, president and chief executive of the Institute for Wealth Management, said that given the tenor, the issuer should have provided more downside protection.

“This is a five year. It’s tied to the Russell 2000. Small-caps have the potential to move a lot. It’s a more volatile index than the S&P. For that holding period, I think that a 15% buffer is not that generous,” he said.

Instead he would be looking at a buffer between 20% and 25% based on this term and underlying index.

Cap

“I realize that volatility is extremely low in general and that pricing these products is challenging,” he said.

The note’s main advantage is to give investors a positive return if the index declined within a range above the buffer, he noted.

“That’s the part that’s really interesting obviously.”

But in exchange, investors had to limit their return to a 50% cap.

For Medeiros who has a bullish outlook on the Russell 2000 index, the cap was too low.

Volatility

“If we have any type of rally even if it’s only in the next couple of years, you could miss some upside,” he said.

Similar structures have been priced before with unlimited upside. But those uncapped products have shown higher digital strikes, usually at par, according to data compiled by Prospect News.

Medeiros conceded that the minimum return guaranteed if the index drops within the set range was probably attractive for mildly bullish investors.

Too long

But the index was too volatile to make this feature helpful. More importantly, the five-year horizon created too much uncertainty in his view.

“Five year is a long time. You have to be very confident in your market outlook. You also have to be very confident in the issuer’s credit. It’s hard to make any kind of forecast. For that length of time, you should be able to get a larger buffer and I believe a higher cap as well.

“It doesn’t make me feel like this is one of those deals that I can’t pass up.”

Alpha

Steve Doucette, financial adviser with Proctor Financial, whose focus is to find structured products that can outperform the benchmarks, said this one offered a wide range of possibilities.

“You’re down more than 15%, you outperform with the buffer,” he said.

“The index rises up to 25%, you outperform with the digital.

“The only time you don’t outperform is if the market is up more than 10% a year.”

He was referring to the 50% cap over five year.

“Basically from zero to +25% you generate alpha.

“Unless you’re a bull and you’re not happy with 10% a year, it’s a nice structure.”

One limitation in the payout is the dividends. Investors have to forego a 1.35% dividend yield.

Doucette downplayed this aspect of the structure, common to most products.

“It’s not a big dividend. It’s more likely that you’re going to outperform,” he said.

Risk in Washington

The 15% buffer was helpful. But the downside should be a concern given the uncertainty over the next five years.

“If we were in a normal market, I would say five year... this may be OK although I’m always worried about the market being up and then back down toward the end,” he said.

But the “political overlay” adds unpredictability.

“If the tax reform happens, we may continue to go through the roof. If it doesn’t the market could crash,” he said.

“It’s impossible to tell.

“If we were looking at the economy only, I would probably feel more comfortable with this term.

“But when you look at this political overlay, well five year may be too long...you may actually need a larger buffer.”

Barclays is the agent.

The notes will price on July 26.

The Cusip number is 06741VZJ4.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.