Barclays’ series of callable worst-of on indexes with daily observation reach sizable bids

By Emma Trincal

New York, April 21 – Barclays Bank plc’s $34 million of trigger callable contingent yield notes with daily coupon observation due Jan. 19, 2024 linked to the worst performing of the Nasdaq-100 index, the Russell 2000 index and the S&P 500 index caught market participants’ attention for the deal’s size, deemed unusual for this type of structure. The offering was part of a series as Barclays brought to market at least three other issues in excess of $20 million with very similar terms, including the same maturity date and underlying indexes.

All notes featured an issuer call and a daily observation of the coupon barrier, which are usually not popular among investors. But the terms contributed to boost the yield and perhaps the size of the offering, a market participant said.

For the $34 million deal, the notes will pay quarterly a contingent coupon at an annual rate of 10% if each index closes at or above its coupon barrier level, 65% of its initial level, on each trading day during that observation period.

The notes will be callable at par of $10 plus any coupon on any quarterly observation date other than the final one.

If the notes are not called and each index finishes at or above its downside threshold level, 65% of its initial level, the payout at maturity will be par plus any coupon. Otherwise, investors will lose 1% for every 1% decline of the least-performing index.

Yield boosters

“Issuer calls are not always easy to sell. We’re not seeing or showing a lot of them,” a distributor said.

“They tend to not be in favor of the investor.

“Also, the daily observation of the coupon doesn’t sit well with most clients.

“At the same time, I can see how investors may be seduced by a 10% yield on indices. Both the discretionary call and the daily observation allow the issuer to raise the coupon and lower the barrier to attractive levels.”

The size of the deal was proof that investors were mostly interested in the higher yield and willing to accept the call and coupon observation as part of a reasonable tradeoff, he noted.

“$34 million is a large size for an autocall. It’s usually more between $1 million and $10 million. If it’s a retail deal, it’s quite unusual. But if it’s an institutional trade for a portfolio manager, then it’s not.”

Reasonable price

The cost of the offering may also have been a factor.

“What strikes me as attractive here is the fee,” said a former syndicate manager.

The fee is 1%, according to the prospectus.

“A lot of the criticism about autocalls is that if they keep on getting called, the fees can really add up.

“1% strikes me as reasonable.”

Another advantage, he said, was the high correlation between the underlying indexes, which adds value to a worst-of structure.

The S&P 500 index and the Nasdaq have a three-year coefficient of correlation of 0.926, while the correlation between the large-cap benchmark and the small-cap index is 0.913. The lower correlation is found between the Nasdaq and the Russell, which have a 0.787 coefficient of correlation.

Headline rate

A perhaps more decisive factor behind the high bid was the double-digit coupon, which is hard to get on worst-of tied to U.S. benchmarks, he noted.

“The 10% coupon is pretty sexy,” he said.

There are reasons for this, he added, noting that the issuer will call the note at its discretion.

“You want to get paid for that. You also want to get paid for the daily observation as it increases the risk of not getting your income.”

The result was an attractive headline coupon, he said.

“You’re not sacrificing the downside for that. It would take a lot for the market to drop more than 35% over close to three years.

“Putting it all together, I’m not surprised about the size of the deal,” he said.

The notes priced on April 14 and settled on April 19.

The Cusip number is 06747R568.

Not just one...

Barclays did not stop with this deal last week, issuing at least three others with remarkably similar terms, including the daily coupon observation and issuer call.

Barclays Bank plc’s $30.02 million of trigger callable contingent yield notes with daily coupon observation due Jan. 19, 2024 linked to the worst performing of the Nasdaq-100 index, the Russell 2000 index and the S&P 500 index paid a 9.7% annual contingent coupon based on a 70% coupon barrier. The final barrier was at 60%.

The notes (Cusip: 06747R543) priced on April 14. The fee is 1%.

A second issue (Cusip: 06747R550) came out for $22 million on the same date. It showed the highest coupon of the series at 10.15%. The downside threshold was set at 60% but the coupon barrier was raised to 70%.

The day before, Barclays priced another similar deal for $28.57 million (Cusip: 06747R576). The contingent coupon was 9.35% and both barriers were set at 65%. The fee was 1.25%, which was slightly higher than that of the three other issues.

UBS Financial Services Inc. and Barclays were the agents for all offerings.

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