Barclays’ autocallable deals on Wynn and GM illustrate two different recovery bets

By Emma Trincal

New York, Nov. 24 – The rotation into cyclical and value stocks is on, fueled by new treatments and soon-to-be approved vaccines against Covid-19 as well as the ending of the uncertainty around the U.S. presidential elections.

This renewed optimism has led issuers to price contingent coupon autocallable deals linked to beaten up stocks, which now seem promising, as well as blue chip names with growth potential as the economy reopens.

On Tuesday, the Dow Jones industrial average broke a new record, surpassing 30,000 for the first time, a sign that optimism is gaining traction.

Two deals

Barclays Bank plc recently priced $750,000 of phoenix autocallable notes due Nov. 21, 2022 linked to the common stock of Wynn Resorts, Ltd., according to a 424B2 filing with the Securities and Exchange Commission.

The notes will pay a contingent quarterly coupon at an annual rate of 15.25% if the stock closes at or above its 50% coupon barrier on a related observation date. The automatic call triggered quarterly if the stock is at or above its initial price will kick off after six months.

The payout at maturity will be par unless the stock finishes below 50% of its initial value, in which case investors will be fully exposed to the decline of the stock.

A week before, Barclays priced a similar deal but on General Motors Co. for $2.47 million. The 13-month notes will pay monthly a contingent coupon at an annual rate of 10% based on a 66% coupon barrier. The notes are automatically callable monthly after six months under the same conditions. The barrier at maturity is also at 66% of the initial level.

Different recovery speeds

Both stocks bottomed on March 18, 2020, but General Motors has recovered at a much faster pace, up 26.65% for the year and hitting on Tuesday its highest level since October 2017. The automaker’s stock has more than tripled from its low of March.

Wynn Resorts on the other hand has been hit harder as casinos and resort operators have been forced to reduce capacity due to the pandemic. While the stock has recovered some of its losses since March, it still trades 36% of its January high.

General Motors is trying to compete with Tesla Inc. to dominate the global market of electric vehicles (EV).

This race and the popularity of the disruptive EV industry among traders, has transformed the traditional blue-chip stock into a momentum play. Wynn is still considered a value stock given its potential for recovery and deeply discounted price.

Defense first

“I would go for the Wynn deal. The downside is more protected with 50% although there is certainly a lot of risk with the casinos getting shut down,” said Kirk Chisholm, wealth manager and principal at Innovative Advisory Group.

“It’s a value play and those stocks, travel, airlines are starting to come back in favor.

“As an alternative to being long the stock, you get paid a pretty good coupon with less risk.”

The chance of seeing the notes called in six months would be a positive outcome, he said.

“It may be a concern if you’re bullish. But I don’t see it taking off.

“People are saying that value stocks are going to take over. But they’ve been saying that for years. It’s too early to tell,” he said.

For now, a stock like Wynn Resorts presents more downside risk than upside potential, he noted.

“Everything is going to close again.

“I would be happy to be called in six months with a 15% annual return.

“You get your principal back and your coupon. Protecting the downside is my priority right now,” he said.

At the casino door

Jonathan Tiemann, president of Tiemann Investment Advisors, said the two deals were very different because each stock allowed investors to express very distinct views.

“The Wynn deal is really a question of when and how completely the economy is going to reopen,” he said.

“Wynn operates casino resorts. Their short-term financial health depends a lot on Covid. In this environment, this note is a straight bet on people starting to travel again.”

For this adviser, the call is a positive outcome.

“It’s a two-year bet, and it’s a binary bet. You either get called with your coupon or you don’t. If the stock slides pretty badly, you hope the 50% barrier will protect you. I don’t know if it’s going to be enough because you’re likely to see the stock going through short-term volatility. But after two years it may be OK. You don’t really know. That’s the risk, and that’s why you’re getting paid a high coupon.”

Despite the similarities in the structures of the notes, the product tied to General Motors was a different investment altogether, he said.

“It’s more of a long-term growth opportunity than a tactical play,” he said.

GM’s long-term opportunity

The company is investing $27 billion in battery electric vehicles for 2020-25, according to David Whiston, sector strategist at Morningstar, who added that the automaker “believes in an all-electric future.”

“With GM, you’re betting on whether the EV momentum is real and if we’re going to see growth again. It’s more of a broader play and it’s a bet on the economy.”

For this adviser, the autocallable structured note is more adapted to a short-term, specific bet.

“If you want a long-term investment in a growth stock, there’s nothing wrong with buying GM directly.

“If you do it with this note, the economy reopens, and you get called. It’s not a terrible bet, but the note doesn’t give you a chance to participate in the long-term trend,” he said.

Best rationale

“In terms of relevance of this structure to the risk that will play out, the deal on Wynn makes more sense than GM.

“The Wynn note is a real proxy for the pandemic. It’s a tactical bet that’s offering you the likelihood of earning a high coupon until the economy reopens with some downside protection.

“I can see a pandemic-related rationale for that trade.

“GM, it’s a different thing. You have to give it more time. The company has a decent shot. They certainly know how to make cars. But this is more of a long-term play, not a one-year story.”

Barclays Bank plc is the agent for both issues.

The notes linked to Wynn Resorts priced on Nov. 16 and settled on Nov. 19.

The Cusip number is 06741WMC1.

The fee is 0.90%.

The notes tied to General Motors priced on Nov. 13 and settled on Nov. 18.

The Cusip number is 06741WLV0.

The fee is 2.15%.

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