Advisers compare series of Barclays uncapped leveraged notes tied to S&P, MSCI EAFE, Euro Stoxx

By Emma Trincal

New York, Sept. 4 – Barclays Bank plc is readying four uncapped leveraged notes with barriers or buffers, giving advisers a variety of choices for their equity allocations. Two of the notes are linked to the S&P 500 index. The other pair offers a European investment theme as one product is linked to the Euro Stoxx 50 index and the other to the MSCI EAFE index, which is heavily weighted in European equity.

Buysiders compared the two pairs on the basis of the trade-off they both offer: more protection at the expense of a longer duration or the opposite. They made their choices from an asset allocation perspective but also based on the respective terms of these products.

Four deals

On the domestic side, the two notes were Barclays’ 0% trigger performance securities due Sept. 29, 2017 linked to the S&P 500, a three-year product, and its 0% trigger performance securities due Sept. 30, 2019 linked to the S&P 500, which is the longer-dated one with a maturity of five years.

The shorter note offers more leverage: 113% to 121% versus 103% to 113% for the five-year note.

However, the five-year product offers 40% contingent protection via a 60% final barrier, compared with 25% contingent protection via a 75% barrier for the three-year deal, according to two FWP filings with the Securities and Exchange Commission.

On the international front, a three-year note, Barclays’ 0% trigger performance securities due Sept. 29, 2017 linked to the MSCI EAFE, offers a shorter duration but less protection. Its upside participation rate is 136% to 146%, and the downside is protected by a 75% barrier at maturity, according to an FWP filing with the SEC.

By comparison, the longer-dated note (five-year term), which is Barclays’ 0% buffered performance securities due Sept. 30, 2019 linked to the Euro Stoxx 50, comes with superior protection, sources said, as it features a 20% buffer. This product, which is also more Europe-centric than the previous one, also gives more leverage with a participation rate of 146% to 156%.

Duration matters

Steve Doucette, financial adviser with Proctor Financial, said that overall, the notes offer a reasonable level of protection but that in some cases, the trade-off is not worth the investment.

“The biggest concern these days is a 10% to 20% correction. Anytime I get some notes with a 25% to 40% barrier, I’m pretty comfortable with any of them even though with the barrier, if you bust through it, you’re long the index while with the buffer you have some of your principal that’s guaranteed,” he said.

However, the richly priced U.S. market adds some risk, especially over the longer term.

“Which one I would favor? I don’t think I would use any of them. With the S&P notes, the concern is that the benchmark has been up so high ... you run the risk of a pullback,” he said.

“They’re not giving you much leverage with the S&P notes, and you have to go five years to get 40% on the downside. Five years is too long.”

Between the two international plays, Doucette said the Euro Stoxx 50 is preferable from the standpoint of the asset class and the terms. Unfortunately, the duration is again a drawback.

“The Euro Stoxx is still underperforming the U.S. index, so if you’re looking for horsepower, something that will catch up to the U.S., the Euro Stoxx deal is your best bet,” he said.

“I also think I would be better off with the Euro one rather than with any of the S&P ones because it has better terms – a hard buffer and more leverage.”

The duration aspect, however, may offset the benefit of the buffer, he noted.

“The real problem with the Euro deal is that it’s a five year. Buffers are hard to come by unless you extend the duration. But then, once you have a longer duration, the buffer may not offer any value once you reach maturity. So I would lean back to the barrier notes,” he said.

Doucette said he would consider negotiating the Euro Stoxx 50 product with the issuer.

“I’d look at the Euro deal with a barrier and a shorter term and see how we can maximize the leverage,” he said.

Conviction

For the U.S. market, Doucette said he would tend to prefer the three-year product.

“From an asset allocator’s standpoint, the question really is where you need exposure,” he said.

“If I want to replace a U.S. exposure, I would look at the S&P notes. Among those two U.S. notes, I’d be OK with the three-year, which has more leverage than the five-year, and I would be satisfied with the 25% protection. Again, I would just try to add more leverage.”

Picking one of the two S&P 500 index products is a matter of market outlook, he said.

“You get the choice between short-term with less protection or more protection with an extended maturity. The leverage is not that much of a factor here because there isn’t much of a difference between the two,” he said.

“The question boils down to your view and if you’re bearish or bullish.

“If you’re bearish on the S&P, you want more protection and less leverage, so that takes you to the five-year. But on the five-year, it’s hard to predict anything, so I would fall back to the shorter-term deal.”

The choice between the MSCI EAFE index note and the Euro Stoxx 50 product is even more complex, he noted.

“It’s a tougher call because you get decent leverage and a better type of protection on the longer note. However, over five years, this extra protection may not be worth much; we could have gone through a dip and gone back up,” he said.

MSCI EAFE pick

Matt Medeiros, president and chief executive of the Institute for Wealth Management, said he is more inclined to pick the shorter-term product for the international allocation but prefers the longer-dated note for the U.S. exposure.

“For the European play, I would prefer the short-term one tied to the EAFE for two reasons,” he said.

“One, I like the idea of a relatively short-term note. And two, I like that it’s more diversified than the Euro Stoxx.”

Investors often use the MSCI EAFE index as a proxy for a European equity allocation, he said, due to the heavy weighting of European markets in the index. European countries make for about 60% of the total, according to the MSCI website. The benchmark tracks all developed countries around the world excluding the United States and Canada, giving investors exposure to non-European markets such as the No. 1 weighting, Japan (19.56% weight), Australia (8.28% weight) and Hong Kong (2.48% weight).

“Our perspective is that if we’re going to focus on one continent – in this case, Europe – we want to be more country specific as opposed to betting on the whole region. At least the EAFE offers exposure to not only Europe but many more markets. So it’s effectively the same thing as having exposure to the Euro Stoxx but with more diversification since you’re adding other developed countries,” he said.

“I’m not big on leverage, so I don’t care so much about the fact that the EAFE deal has less upside leverage than the Euro Stoxx one.”

Beware U.S. valuation

For the United States, however, Medeiros has a more defensive take.

“Generally speaking, I like the idea of a shorter period. However, when it comes to the U.S., with the market running the way it has, I would probably exceptionally prefer the five-year deal because it has more protection on the downside. I don’t anticipate a 40% correction, but I wouldn’t rule it out relative to the run-up the S&P has had. So because of this valuation aspect, I would go longer in duration in this particular case,” he said.

“I would look at both the S&P and the European notes very differently because the S&P has had such a strong run. ... Frankly, you can make the argument that it’s getting close to being overvalued.”

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

The two deals linked to the S&P 500 index are expected to price Sept. 25 and settle Sept. 30, and the two international notes will price Sept. 26 and settle Sept. 30.

The Cusip number is 06740D608 for the three-year S&P 500 deal, 06740D400 for the five-year S&P 500 deal, 06740D301 for the MSCI EAFE deal and 06740D509 for the Euro Stoxx 50 deal.

© 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.