Barclays’ $10 million autocalls on SPDR S&P 500 offer good terms for target return

By Emma Trincal

New York, Jan. 31 – Barclays Bank plc’s $10 million of autocallable contingent interest notes due Jan. 27, 2023 linked to the SPDR S&P 500 ETF Trust are designed for investors seeking a defined return associated with decent chances of achieving it, a financial adviser said.

The notes will pay a contingent monthly coupon of 13.3% per annum if the ETF closes at or above its 85% coupon barrier level on the determination date for that period, according to a 424B2 filing with the Securities and Exchange Commission.

The notes will be called at par plus the contingent coupon if the ETF closes at or above its initial share price on any monthly call observation date.

The payout at maturity will be par unless the ETF finishes below 85% of its initial share price, in which case investors will lose 1.17647% for each 1% loss beyond 15%.

Risk mitigation

“I absolutely love that note,” said Jerry Verseput, president of Veripax Wealth Management.

“I don’t think the market is going to rise 13% anymore given all the economic changes we’re going through. I’d be really surprised if we had a 13% market return in the next 12 months. But if it happens, fine. 13% should accomplish any financial goal.”

The buffer was one of the most attractive pieces of the structure.

“You have a chance to make 13% on the upside with less risk. That’s what I love about that note,” he said.

The memory feature of the notes was helping in that regard, he said.

“You can easily beat the market on the upside, and if not, chances are you do get that 13% while taking less risk.

“From a risk management standpoint, it’s very attractive,” he said.

The choice

The notes would not be suitable for all investors, he said.

Part of this adviser’s process is to ask his investors how they measure success.

Two main strategies come to mind, he said.

“I ask them: do you want to beat the market at the risk of losing money?

If the answer is yes, investors in the notes – in the event of a 25% market drop – would only lose 10% of their principal. For such clients whose goal is to outperform the market, the outcome would be positive, he said.

The other strategy, he explained, which is his second question to his clients, is to seek a defined return.

“They seek a target return with a higher reliability. They want to maximize the chances of getting it even if it means underperforming the market. For them, it’s about getting the return that will fit their financial plan.”

For those clients, a 10% loss of principal based on the previous example, would represent a failure despite the outperformance since the goal is to secure a reasonable and achievable positive return.

The Barclays deal fell into the second category, he said.

“When clients want a target return, I do digitals, snowballs and Phoenix autocalls like this one. You have a defined outcome. You’re shooting for 9% or 10% or 13%. If the market is up 30%, you still have accomplished your goal and you didn’t take the same risk.

“The buffer is key in this note because that’s how you can achieve your goal with less risk,” he said.

Autocall

One of the downsides of the product was the monthly observation dates over a short maturity, as it increased the call risk.

“It’s always a little bit disappointing to get called early especially when you like the terms,” he said.

“But as long as you’re making 13%, even if you don’t get the full 13%, it’s still 13% annualized.

“You get called, you get your proceeds, and you redesign a new note. It’s just a little bit more work.”

If volatility picks up when the notes get called, the extra “work” may even provide opportunities for better terms, he said.

For investors seeking to reduce reinvestment risk, there is always the option of postponing the date of the first call.

“You just don’t get the same terms. That’s a tradeoff,” he said.

This adviser would be willing to decrease the coupon to prevent the notes from being called too early.

“We don’t need 13%. We can do 11% if it means six-months no call,” he said.

Disappointing

Jerrod Dawson, director of investment research at Quest Capital Management, objected to the reinvestment risk despite appreciating some of the terms.

“It looks pretty attractive even though it’s a 12-month product,” he said.

“The market looking forward is not likely to go up as much. 13% would probably be above average.

“The buffer is nice too.

“But the call feature gives me pause. It sort of takes away all those benefits.

“I don’t see how you can avoid the call. The odds of not getting the full 13% are high.

“That’s why it’s not as good as it looks like.”

The agent is Barclays. J.P. Morgan Securities LLC is the placement agent.

The notes settled on Friday.

The Cusip number is 06748XAG6.

The fee is 0.2%.

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