Barclays’ $39.42 million lookback notes tied to S&P 500 offer entry to play elections’ wildcard

By Emma Trincal

New York, Nov. 9 – Barclays Bank plc’s $39.42 million of 0% lookback entry Performance Leveraged Upside Securities due Feb. 5, 2018 linked to the S&P 500 index enabled investors to gain leveraged exposure to the market ahead of the U.S. elections while minimizing the chances of buying high, sources said.

The initial level will be the lowest closing level of the index during the period from pricing up to and including Nov. 14 and will not be higher than the index’s closing level on the pricing date, according to a 424B2 filing with the Securities and Exchange Commission.

The payout at maturity will be par plus 200% of any index gain, up to a maximum return of par plus 11.75%.

Investors will be fully exposed to any losses.

The notes priced on Oct. 31, or a little bit more than a week prior to the Nov. 8 elections. The index closed at 2,126 on the initial day.

Risk control

“It’s a way to get people to feel comfortable putting money in the market just ahead of the elections,” said a market participant.

The lookback observation period consists of 10 trading days, which gives investors about two weeks to lock in a low closing price. The lowest closing price from the pricing date through Wednesday was seen on Friday at 2,085. It was nearly 2% lower than the closing price of Oct. 31.

Lookback option

“There was so much uncertainty last week, they used a lookback to set these fears aside,” this market participant said.

“The cap is a bit low, and I assume it is because a lookback option in general is always expensive.”

However, the 10-day observation is relatively short, which may have helped the cap.

Post-election volatility is likely to pick up momentum, he said, even if the benchmark closed up 1.1% on Wednesday, the first trading day after the results of the election of Donald Trump as the new president.

“It’s likely that there will be a dip in the next coming days, which could give investors an edge with a good entry point.”

Lookback features are not the equivalent of the downside protection offered through a buffer or a barrier, he said.

But they can provide a certain level of safety in some particular circumstances.

“A lookback is always going to be expensive. You’re essentially buying insurance against event risk. But it may be a good way to trade certain markets,” he said.

Good entry

Andrew Valentine Pool, main trader at Regatta Research & Money Management, said he is not very familiar with the feature but that he finds it interesting.

“I’ve heard of it. We’ve seen them before, but I don’t think I’ve used any,” he said.

“I like that. It’s different.”

Pool said he uses leveraged notes on a regular basis as a way to mitigate risk. The structure allows him to put less money at risk to achieve a certain exposure target. He also likes the fact that the leverage is only applied to the upside.

“We do like some protection. As some of our holdings mature, we do need to replace them,” he said.

“Even though this note doesn’t give me protection per se, it offers a decent entry point.

“It gives you the benefit of the best price within a certain timeframe.”

Despite these advantages, a lookback is not the same as having downside protection.

“It’s not as good as a buffer because a buffer will guarantee a certain amount of protection. The notes can be used to get in at the right time. It’s a good starter, but you still don’t have any downside protection at the end.”

Cap

Despite the absence of any buffer or barrier, Pool said the upside is reasonably attractive.

The 11.75% maximum return over 15 months provides investors with a 9.3% return per annum on a compounded basis.

“I think that’s fair,” he said.

“Even without the protection, it’s not great, but it’s fair.”

Barclays was the agent. Morgan Stanley Wealth Management distributed the notes.

The notes (Cusip: 06744M851) priced on Oct. 31.

The fee was 2.25%.

© 2015 Prospect News.
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