Barclays’ $158,000 11% two-year autocalls tied to energy stocks may not call after the sell-off

By Emma Trincal

New York, Feb. 6 – Barclays Bank plc’s $158,000 of 11% autocallable notes due Jan. 30, 2020 linked to the least performing of the common stocks of Marathon Oil Corp., Southwestern Energy Co. and Valero Energy Corp. priced before the sell-off, making the strike price closer to the barrier level. But the guaranteed coupon as well as the low barrier threshold should offset the risk of further price declines, said a financial adviser. Another expressed a more cautious view.

The coupon of 11% a year is payable monthly, according to a 424B2 filing with the Securities and Exchange Commission.

The notes will be called at par if each stock closes at or above its initial level on any valuation date.

The payout at maturity will be par unless any stock finishes below its 50% barrier level, in which case investors will be fully exposed to any losses to the worst performing stock.

The deal priced on Jan. 26. The underlying stocks priced at $18.84 for Marathon, $5.00 for Southwestern Energy and $98.69 for Valero. Since then the market went through last week’s sell-off and Monday’s plunge, which saw the Dow Jones industrial average shed 1,175 points.

At Tuesday’s close Marathon was down 8.55% from its pricing level, Southwestern Energy fell by more than 21% to $3.94 from its $5 initial level and Valero’s price dropped 8.35%. Closing prices were $17.23 per share, $3.94 and $90.46, respectively.

Nice trade

“It might be a nice trade actually,” said Tom Balcom, founder of 1650 Wealth Management.

“Your coupon is guaranteed. It’s a pretty high coupon. And it’s unlikely that you’re going to get called. That means chances are you’ll get your coupon for two years. To me it’s better than being called after only three months with 2.75%.”

The automatic call was unlikely to happen, at least in the short term, he said, because the underlying stocks have already incurred strong declines in price.

“It’s not going to be so easy to go back to initial price, especially if we see more volatility looking forward,” he said.

Barrier

If the absence of an automatic call eliminates the reinvestment risk, investors are still exposed to the full market downside if the barrier is breached.

Balcom said that it was unlikely to happen.

“I always look at probabilities. A 50% barrier is huge. Could the barrier be hit? Yes, it could. It’s possible but unlikely.”

From Tuesday’s closing prices, the stocks would have to drop another 30% to 40% to trigger a loss at maturity.

“This note is not a bad deal if you’re looking for income. But as always, you have to be familiar with the names.”

Worst-of structure

Donald McCoy, financial adviser at Planners Financial Services, said the trade was too risky for his style.

He pointed to the worst of three stocks first.

“The downside of it is that you’re not really spreading the risk. You depend on the worst performing stock,” he said.

“Getting 22% over two years is fine. But your downside is potentially 100% of your investment.”

McCoy expressed more concern about the share price of Southwestern Energy, which trades below $5.

“Obviously there’s more risk in the lower-price stocks. There isn’t that much trading volume and they tend to be more volatile,” he said.

He noted that the stock would hit the barrier if it dropped 36.5% from its current $3.94 price to the barrier threshold of $2.50.

“It seems like a big move but it’s really only one buck and a half.”

Another concern was the volatility of the energy sector in general, which took the biggest losses over the past few days, he said.

The implied volatility of the underlying stocks themselves is high, ranging from the 30’s to the 70’s, according to the Options Industry Council.

Finally, the tenor of the notes was another concern.

“The stocks are already down. It underscores the risk. You could have a significant short-term volatility that comes out of nowhere. If it was a five-year, things would even out a little bit. Generally, the longer you’re glued in your timeframe, the more likely the overall trend is going to be flat or up. But here it’s a shorter window. You may not have enough time to recover. Over the next two years we could easily see the market plotting downward.”

Barclays is the agent.

The fee is 3%.

The Cusip is 06744CQT1.

© 2015 Prospect News.
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