Advisers compare two Barclays’ worst-of notes callable on indices, mix of assets

By Emma Trincal

New York, July 19 – Barclays priced two callable contingent coupon notes tied to the worst-performing of three assets on the same day, allowing advisers to compare the two structures. Pricing was on July 9 for both issues.

The terms offered similarities except for the tenor and one of the underliers, which naturally led to quite different coupon rates and barrier levels.

First deal

The first deal was Barclays Bank plc’s $1.56 million of callable contingent coupon notes due Oct. 13, 2022 linked to the worst performing of the Nasdaq-100 index, the Russell 2000 index and the VanEck Vectors Gold Miners ETF, according to a 424B2 filing with the Securities and Exchange Commission.

The notes pay a contingent monthly coupon at an annualized rate of 11.05% if each asset closes at or above its coupon barrier level, 65% of its initial level, on the related observation date.

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

If the notes are not redeemed early, the payout at maturity will be par unless any asset finishes below its initial level and any asset ever closes below its 65% knock-in level, in which case investors will be fully exposed to the decline of the least performing asset from its initial level.

Second issue: pure equity

In the second issue, Barclays priced $1.7 million of callable contingent coupon notes due July 12, 2024 linked to the worst performing of the Nasdaq-100 index, the Russell 2000 index and the S&P 500 index, according to another 424B2 filing with the SEC.

The notes pay a contingent quarterly coupon at an annualized rate of 8% if each index closes at or above its coupon barrier level, 75% of its initial level, on the related observation date.

The notes will be callable in whole at par plus any coupon due on any quarterly call date.

If the notes are not redeemed early, the payout at maturity will be par unless any index finishes below its 70% final barrier level, in which case investors will be fully exposed to the decline of the least performing index from its initial level.

Asset mix

Jerry Verseput, president of Veripax Wealth Management, pointed to some drawbacks associated with both notes.

For the first one, the mix of underliers was his main concern.

“GDX is the most important underlier. The other ones are there to boost the return,” he said.

The VanEck Vectors Gold Miners ETF trades on the NYSE Arca under the ticker “GDX.”

Part of the problem with the three underlying assets was the difficulty for investors to have a clear outlook on the asset mix.

“If clients’ expectations are that the note will behave like the stock market and GDX goes down, which it can do, they won’t understand what happened,” he said.

“It’s really primarily a play on GDX.”

The use of the popular gold miners fund makes sense, he added.

“Gold is unlikely to go down with inflation starting to perk out.

“I would want to keep the structure but keep the stock indices out. I would rather see a more gold-focused exposure,” he said.

Thin barrier

His criticism of the second deal was more directed at the terms, particularly at the margin of safety.

“I don’t like the small barrier when your entire exposure is to the stock market,” he said.

“It’s good to have a longer maturity. I wouldn’t want to go short-term if it’s all stock.

“But at the same time, for a three-year, I would expect a deeper barrier.”

He concluded that his clients would not be looking at either deal, the first one, because of the “underlying idea,” the second, due to the barrier size.

“If I had to pick one, the second one would be better but only if I could get a deeper barrier or a higher coupon, one or the other.”

His preference for the second offering was due to a reluctance to invest in worst-of showing low or even negative correlation to one another.

“When you’re mixing indices that are so different, clients don’t really understand it. You’re mixing two different ideas,” he said.

“We’re seeing more mixed indices because terms have come down so much.”

Bargain hunting

While the wrong combination of underliers cannot be changed if it’s the basis of the notes, terms can be improved.

“Today would be a good day to get pricing. We’re actually getting quotes,” he said.

Stock prices tumbled on Monday on concerns about a Covid-19 resurgence. The Dow Jones industrial average fell 726 points, or 2.1%, its worst decline since October. Volatility, as measured by the VIX index, surged to an intraday high of 25.09 high, its highest level since May.

For contingent coupon notes with call features, terms can significantly improve as volatility spikes.

Volatility

Carl Kunhardt, wealth advisor at Quest Capital Management, said he was not satisfied with the volatility and length of the notes.

“I wouldn’t do either,” he said.

“GDX is too volatile and so is the Russell 2000.”

Kunhardt said he was less concerned about the Nasdaq as it has grown into a large-cap index.

For the second issue, the adviser objected to the tenor.

“I don’t like a three-year on a worst-of note on indices. Look at the Dow down 800 today,” he said.

“The S&P could drop 25%.

“Committing capital on a worst-of over three years with a small barrier...not my cup of tea.”

He pointed to additional concerns on the first deal.

“I couldn’t stomach the 15-month timeframe. It’s too short,” he said.

“I also don’t like the volatility of GDX.

“GDX and the equity benchmarks have a negative correlation.

“If the market is up, GDX will be in a hole. If we have a pullback, GDX will rally.

“You’re damned if you do and damned if you don’t.

“My job is to reduce volatility in a portfolio, not to introduce additional volatility.”

Barclays was the agent on both deals, which settled on July 14.

The Cusip number on the first deal is 06748W3X9.

The fee is 0.55%.

The second offering’s Cusip number is 06748W4A8.

The deal carries a 0.75% fee.

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