Barclays' autocallable notes linked to Vanguard FTSE Emerging Markets offer high return score

By Emma Trincal

New York, Jan. 17 - Barclays Bank plc's 0% annual autocallable notes due Jan. 31, 2017 linked to the Vanguard FTSE Emerging Markets exchange-traded fund show a lower than average risk level compared to similar structures and the potential to get a high call premium, said Suzi Hampson, structured products analyst at Future Value Consultants.

The notes will be called at par plus an annualized call return of 10.25% if the fund's shares close at or above the initial share price on any of the call dates, which will fall in January or February of each year, according to a 424B2 filing with the Securities and Exchange Commission.

The payout at maturity will be par if the fund's final share price is at least 80% of the initial share price. Otherwise, investors will be exposed to the decline from the initial share price to the final share price.

Popular structure

"These autocallable structures have become more popular. For people who have a view on the underlying, it offers a way to get a higher coupon," Hampson said.

The notes are designed to generate income, she said, as the return is a set amount, not linked to the growth of the underlying.

"Your coupon can be earned even if the market is flat," she said.

Future Value Consultants has several categories for these income products. The Barclays notes, she said, fall into a product type defined as "review," or income products with a contingent coupon.

Review category

"This note falls under our 'review' category. The coupon may or may not be paid. It is not a coupon-bearing note. The coupon is contingent upon certain conditions that need to be met on the observation date," she said.

"And those are the level of the underlying price and the observation of the price, which is limited to three annual dates through the life of the notes."

Reverse convertibles belong to another group, the reverse convertible category. Those have a fixed income and a fixed maturity, according to Future Value Consultants' methodology. When a reverse convertible product is autocallable, Future Value Consultants designates it as a "review" reverse convertible.

"The important point regarding this particular product is that it belongs to the review group. We will compare it and rate it against other review products that all have one thing in common, the contingency of the coupon," she said.

Return and coupon barrier

The coupon threshold and the call trigger are at the same level of 100, the initial price of the underlying, she noted.

"It's at the same level, at par, that both a call and a coupon payment will be triggered. Other review deals are different. They may show a coupon threshold at a lower level than the initial price, for instance at 80% of it. Those products allow investors to collect the coupon, sometimes over several periods, without being necessarily called as long as they are above 80% but below 100%," she said.

"In this product, the coupon barrier is at the same level of the call strike. Both the call and the payment are triggered by the same event, under the same conditions. You can't have one without the other.

"That tends to give you a higher return compared to a structure where the coupon threshold is lower than par, all things being equal."

Fixed versus contingent

All things being equal, investors should expect a higher return when comparing any review product to a reverse convertible, she said. That's because review products are based on the uncertainty of the payment while reverse convertibles offer a fixed interest rate.

"A contingent coupon should give you a higher return than a fixed coupon. The higher the risk, the higher the return," she said.

Those notes differ from participation notes as well, she added.

"Income products in general, including this one with contingency, offer a fixed amount of return. It's nothing else but a cap. Investors cannot expect to earn more than the coupon whether it's a fixed interest rate or a contingent coupon delivered in the form of a premium," she said.

"You are not going to participate in the price appreciation of the underlying.

"That's why this is not a bullish note. You don't need high growth in order to get your return. In fact, you don't need any growth at all. This product would be most appropriate in a flat, not very volatile market. You benefit from the fixed amount of return, but your gain is limited to that. If you were bullish, you would want to participate in the upside."

Low market risk

The notes offer a relatively low risk profile, in particular a lower than average amount of market risk, according to Future Value Consultants' report.

The risk associated with a structured note is measured by Future Value Consultants' riskmap. The rating measures the risk on a scale of zero to 10 with 10 being the highest level of risk. The riskmap is obtained by adding its two sub-components, market risk and credit risk.

The 1.10 market riskmap of the product is "much lower" than the 3.10 average market riskmap for products of the same type, she observed.

"We have a one-year implied volatility of 23.5% on this underlying fund, which is higher than the S&P 500 at 15%," she said.

"However, we're not comparing this product with notes tied to the S&P. We're comparing it with its peers, and a lot of products in the review category are tied to stocks, which have a higher volatility than the S&P."

The 80% final barrier was also a factor that compared favorably to similar products with a barrier observed any day, she said.

On the other hand, the product's 0.60 credit riskmap is higher than the average for review products, which is 0.39.

"This is unlikely to be due to Barclays' credit," she said.

"The five-year credit default swap spread on Barclays is 90 basis points, which is about the same as Bank of America or Morgan Stanley. Instead, it's the maturity that drives the credit risk higher in this case. We have a three-year term while most of the products in this category are one year or even shorter."

The notes' riskmap of 1.71 compares well with 3.49, the average riskmap for this product type.

"This is simply due to the extremely low level of market risk compared to average," she said.

Return, price scores

Future Value Consultants measures the risk-adjusted return using its return score. The rating is calculated using five key market assumptions: neutral assumption, bull and bear markets and high- and low-volatility environments. A risk-adjusted average return for each assumption set is then calculated. The return score is based on the best of the five scenarios. With this product, the optimal scenario used to calculate the score is low volatility.

The return score of the notes is 7.60, compared with an average of 6.69 for products of the same type.

"With one point above average, it's definitely a good score. It gives you an indication of where the return fits with that type of risk. The riskmap is lower than average, so you have less risk to start with. And the product is giving you well above the average return for that kind of risk," she said.

For each product, Future Value Consultants computes a price score that measures the value to the investor on a scale of zero to 10. This rating estimates the fees taken per annum. The higher the score, the lower the fees and the greater the value offered to the investor.

The average price score for the review category is 7.68. In comparison, the notes have a 9.78 score.

"This is an outstanding price score, almost two points above the average. It shows that compared to similar products in the same category, the notes offer good value for your money," she noted.

Finally, the overall score measures Future Value Consultants' general opinion on the quality of a deal. The score is simply the average of the price score and the return score.

The notes have an overall score of 8.69 versus an average for the review category of 7.18.

"It's a very encouraging, impressive score. For an investor who would want to invest in these types of products, there is not much that could put them off in there," she said.

The notes (Cusip: 06741J5X3) are expected to price Jan. 28 and settle Jan. 31.

Barclays is the agent.

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