Timeframe, memory feature work for Barclays’ $10 million autocalls on Oil Services

By Emma Trincal

New York, March 19 – Barclays Bank plc’s $10 million of contingent income autocallable securities due March 17, 2022 linked to the VanEck Vectors Oil Services ETF have priced at a high entry point, but other factors contribute to mitigate the risk of a correction, said Steven Jon Kaplan, founder and portfolio manager of True Contrarian Investments.

Each month, the notes pay a contingent coupon at an annual rate of 14.75% if the fund closes at or above its downside threshold level, 70% of its initial share price, on the observation date that month, according to a 424B2 filing with the Securities and Exchange Commission. Previously unpaid coupons will also be paid.

The notes will be automatically called at par if the fund closes at or above its initial share price on any monthly observation date.

If the fund finishes at or above the downside threshold level, the payout at maturity will be par. Otherwise, investors will receive a number of shares of the ETF equal to $1,000 divided by the downside threshold level or, at the issuer’s option, an amount in cash equal to the value of those shares.

Kaplan said that the timing of the pricing was not the best. But the structure and the time horizon offset these negative aspects of the deal.

“The fact that you can get the previous unpaid payments rates is very advantageous,” he said.

“The energy rally began in March of last year. These types of energy rallies tend to last one or two years. So, by the time the notes mature in March 2022, you have a good chance of getting full payment.”

Some structures, such as Phoenix autocalls, do not pay previous missed payments. But the notes offer such feature, which is known as “memory.”

“Without it, the note would be terrible because your timing for buying is poor. I expect the share price to drop in the near term. But it will be temporary. A year should be enough for the asset price to recover,” he said.

52-week high

Kaplan assumes a sell-off is underway because investors are buying at a record high.

The notes priced on March 12 with an initial underlying level of 222.92, which was the previous closing level.

Since its 52-week low of March 18 of last year at 66, the ETF share price more than tripled.

On Thursday, it reached a 52-week high at 230.

“You’re coming in at a super high point. It’s very risky,” he said.

“But you’re getting compensated for that with this high coupon and the possibility of catching up later.”

Kaplan looked at a recent low at the end of October when the ETF traded at 80.

“If it goes back to where it was then, you’ll lose more than 60%, which is twice as much as the barrier level.

So, this trade is not without risk for sure,” he said.

Bullish crowd

Kaplan sees signs of a decline near term.

“Oil is overdone in the short term. There will be a correction,” he said.

“Insiders are selling energy shares right now. That tells you that top executives of those companies don’t believe the sector has good prospects.

Historically this fund has not always been so overvalued, he noted.

“This is a hot sector that is about to get cold based on what insiders are doing.

“From March to October, this ETF was extremely unpopular. The fear of the coronavirus putting travel plans on hold and grounding airlines was overwhelming. Then it went up a lot. But this is a volatile ETF. Now it’s about to head down again,” he said.

Investors neglected the famous “margin of safety” when entering the trade in his view.

“Personally, I would not buy something after it reaches a major high point,” he said.

“Once something starts skyrocketing you should actually stop looking at it.”

Good timeframe

Another risk factor was the concentration of the fund, which is only composed of 25 stocks, he noted.

The top two – Schlumberger NV and Halliburton Co. – make 30% of the portfolio.

But investors who bought the notes benefit from the memory feature and the timeframe of the deal.

“I think the length of the notes and the seasonality of oil both work in your favor,” he said.

“Energy prices tend to peak in the first half of the year. So next year in March is favorable.

“The price of the ETF may drop in the meantime, but as long as it comes back enough to be above 70%, you should get all the missing payments. The cumulative nature of the payments is really a great thing.

“Of course, I would prefer a bigger barrier for such a volatile asset.

“But by this time next year, the effect of the pandemic will be much diminished. People will be travelling again. Energy usage is going to be higher.

“We could in theory finish at the October levels and see a 60% drop. I’m not ruling out the risk.

“But given the amount of time you have and well-established seasonal trends for oil, I think you have a decent probability of getting your money back with your full 14.75% coupon.

Barclays is the agent. Morgan Stanley Wealth Management is acting as a selected dealer.

The notes settled on March 17.

The Cusip number is 06741WRY8.

The fee is 0.2%.

© 2015 Prospect News.
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