Barclays’ $1.37 million autocallables on two oil funds offer rare buffer

By Emma Trincal

New York, July 31 – A worst-of contingent coupon autocallable deal caught market participants’ attention, not for its size ($1.37 million) but for a relatively new way to price the popular structure. The product includes a buffer at maturity, a rarity for an autocall, which is almost always built on a barrier.

“A buffer is definitely unique for an autocall,” a financial adviser said.

Barclays Bank plc priced $1.37 million of buffered autocallable notes due July 20, 2026 linked to the least performing of the United States Oil Fund, LP and the SPDR S&P Oil & Gas Exploration & Production exchange-traded fund, according to a 424B2 filing with the Securities and Exchange Commission.

If the closing value of each reference asset is at or above 65% of its initial value on a monthly observation date, investors will receive a contingent coupon at an annual rate of 8.05% on the related contingent coupon date.

The notes will be automatically called at par plus the coupon if each underlying closes at or above its initial level on any observation date after one year.

If the return of the lesser-performing underlying is at least negative 25%, the payout at maturity will be par. Otherwise, investors will lose 1% for every 1% decline of the lesser-performing underlying beyond 25%.

Tradeoff

“We’ve seen some autocalls with buffers. I wouldn’t say they’re so common given the current volatility across all markets, but we’ve seen a couple,” said Matt Rosenberg, sales trader at Halo Investing.

The 25% hard protection was uncommon, Rosenberg said. But the tradeoff consisted in a longer holding period.

“The seven-year duration may be why they were able to put a buffer,” he said.

“A lot of the 25% barrier we see are shorter-dated notes. But they’re not giving you any buffer.”

For the financial adviser, the term of the notes was a deal-breaker.

“For most clients, seven years would be way too long even on an autocall. Three years would be the max,” he said.

Oil assets

The two underlying funds, one tracking the price of crude oil, the other, the performance of U.S. oil stocks, are relatively correlated even though one is a commodity fund and the other, a stock ETF. The greater the correlation between the two assets, the lesser the risk for the noteholders. That’s because positive correlation reduces the odds of one underlying falling while the other is rising.

But having as one of the underliers a commodity fund especially on a longer maturity represented a red flag for Rosenberg.

Commodity-linked

“In my opinion, seven years on an energy trade is a bit of a risk given the fundamentals of the energy market, its volatility and the potential for big swings in oil prices.

“If it doesn’t get called there can be some concerns.

“It’s not like investing in the S&P where the chances of getting called are much greater.

“This is really a commodity-linked note on a long maturity. Seven years is a long time with a volatile asset like oil,” he said.

Looking back

A veteran structurer said the product did not surprise him that much.

“It’s true that most autocalls are done on barriers. But buffers pre-existed barriers. Buffers are a primitive technology that was invented and used before barriers. It’s after the market mastered the use of buffers that they actually switched to barriers so that they could enhance the terms,” he said.

“From the perspective of the manufacturer, buffers are easier to do than barriers. So why not? Just because we haven’t seen them on these types of products for a while doesn’t mean it has never been done before.”

Barclays is the agent.

The notes settled on July 18.

The fee is 4.25%.

The Cusip is 06747N6F6.

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