Barclays’ callable contingent coupon notes on travel stocks show defensive recovery play

By Emma Trincal

New York, Oct. 21 – Barclays Bank plc’s callable contingent coupon notes due Oct. 31, 2024 linked to the worst performing of the common stocks of Wynn Resorts Ltd., Southwest Airlines Co. and Carnival Corp. caught investors’ attention for the high coupon and deep barrier available to investors willing to bet on a return to normal after the pandemic. In this scenario, travel stocks are expected to rally, advisers said.

The notes pay a contingent monthly coupon at an annualized rate of 19.5% if each stock closes at or above its coupon barrier level, 70% of its initial level, on the related observation date, according to a 424B2 filing with the Securities and Exchange Commission.

The notes will be callable in whole at par plus any coupon due on any monthly call date after three months.

If the notes are not redeemed early, the payout at maturity will be par if each stock finishes at or above its 50% barrier level.

Otherwise, investors will be fully exposed to the decline of the least performing stock from its initial level.

Outperformance

“It’s an economic recovery play,” said Steve Doucette, financial adviser at Proctor Financial.

“Here is the interesting thing. They expanded the parameters. Your coupon is almost 20% and your downside is protected half-way down. That’s a big range. I just can’t believe you would get that much interest rate with that kind of barrier. Obviously, these are very volatile stocks.”

He looked at the chart, observing the deep declines during last year’s pandemic-induced sell-off and the ensuing up-and-down of the stock prices, mainly driven by a mixed picture of positive and negative news around Covid.

Still undervalued

“All these stocks have come back a bit, but they’re still not at the levels they were back a few years ago,” he said.

At the end of 2017, the share price of Southwest Airlines was at $66, he noted. The stock closed at $48.66 on Thursday.

“If we go back to those highs, you’re talking about a 35% increase. Can we get back to those levels? We don’t know. But if you owned the stocks and the economy recovers, you could get a nice bump up. It depends a lot on Covid. We have the boosters. That’s an improvement,” he said.

The same holds true for the pre-pandemic valuation of Carnival, which traded at $72 in January 2018 versus its $22.33 closing price on Thursday.

“If you’re bullish on Carnival over a three-year period and if we revisit those highs, you’ll more than triple your investment,” he said.

Wynn Resorts, which closed at $91.08 on Thursday, also remained far from its previous highs. The share price was as high as $202 in May 2018 and $250 in March 2014. If the stock was to reach those peaks again, investors would more than double, or nearly triple their investment, he noted.

Income play

The note however was not designed for price appreciation. Bulls on the hospitality and leisure industries would be better off buying the stocks directly or using a note on the sector,” he said.

“If I like the space, I’d structure a leveraged buffered note on it.”

For yield-seekers however, the note was promising.

“It’s a pretty safe income play with the 50% barrier. And what a coupon!”

Despite the barrier and the coupon, Doucette said he would avoid exposure to individual stocks.

“I would pick an index to eliminate the company risk,” he said.

But he liked the structure.

“It’s a great note for income with a lot of protection,” he said.

Cyclical

Matt Medeiros, president and chief executive of the Institute for Wealth Management, said that several variables could influence the future of the travel industry and not just Covid-19.

“I don’t follow closely the leisure industry, but the terms of the note seem very interesting,” he said.

“It’s a very cyclical sector, one that has seen tremendous headwinds last year with Covid and will continue to face some challenges.

“We can’t predict the development of the Covid-19 crisis. But Covid is certainly a factor in how those stocks will perform in the future. If the health crisis deteriorates the impact will be negative. But no one can make any call in that area.

“On the other hand, I can look at things that are pretty much known. We know that higher inflation and higher taxes will potentially decrease discretionary spending, which means less discretionary income to take these trips,” he said.

Valuations, terms

Valuations were attractive, he noted.

“Some of these stocks are still far below their highs of a few years ago.

“And then you have the 50% barrier. That’s a pretty solid protection,” he said.

Medeiros said he would not show the notes to his clients simply because he does not invest in individual stocks.

“It’s not something we spend a lot of time researching,” he said.

But the terms of the notes were attractive.

“Three years is good. The 19.5% annual coupon, or 1.62% a month, is very rewarding compared to the 1.7% yield on the 10-year Treasury.”

“This note would go in the higher risk bucket of your allocation decision. This is definitely not fixed-income. For your fixed-income bucket, you want something that’s much more predictable,” he said.

The issuer call beginning after three months was not objectionable.

“If you get called in three months, you’re likely to have collected three months’ worth of income. That’s a 4.86% return. Not bad for three months. I wouldn’t have a problem with the call feature, even if it’s at the discretion of the issuer.”

Barclays is the agent.

The notes will price on Oct. 27 and settle on Nov. 1.

The Cusip number is 06748WNY5.

Tech deal

Barclays is also prepping a similar deal for next month. The three-year maturity, the exposure to the worst of three stocks, the issuer call, and a strong protection are some of the common features between the two issues.

For this second offering, the return is linked to Amazon.com, Inc., Advanced Micro Devices, Inc. and Tesla, Inc. The notes pay a quarterly contingent coupon of 13.25% if the stocks are at or above a 70% coupon barrier on the observation date.

The issuer has the option to call the notes on any quarterly observation date. More unusual: the downside protection consists of a 30% hard buffer.

Tradeoff

Despite the defensive downside, Doucette said he would not consider this offering.

“I like tech. Tech stocks are doing OK no matter what. Unless you have a global recession and even then... These stocks keep on moving forward,” he said.

“You would have to be pretty bearish to trade that tech exposure and give up some potentially high returns for a 13.25% upside. I’m not getting excited about that,” he said.

The Cusip number for this offering is 06748WNV1.

The notes will price on Nov. 5 and settle on Nov. 10.

Barclays is also the agent.

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