Call, low correlation boost yield for Barclays’s contingent coupon notes on gold, biotech ETFs

By Emma Trincal

New York, Aug. 2 – Barclays Bank plc’s callable contingent coupon notes due May 7, 2021 linked to the least performing of the VanEck Vectors Gold Miners exchange-traded fund and the SPDR S&P Biotech ETF resemble most worst-of deals using correlation and a call option to raise the coupon, sources said. This product however brings into play two other elements that enhance the yield even more.

First, the notes are callable at the discretion of the issuer, not automatically called.

Second, the correlation between the two underlying ETFs is insignificant.

“You don’t have the regular autocall in here. Instead the issuer can call the notes whenever they want.

“That’s going to give investors more premium,” said a market participant.

The contingent coupon will be paid quarterly at a rate of 11.5% to 12.5% per year if each ETF closes at or above its coupon barrier on the review date for that quarter, according to a 424B2 filing with the Securities and Exchange Commission.

The coupon barrier is 60% of the worst-performing fund’s initial level.

“Investors take on more risk, so the low barrier makes sense,” he added.

No no-call

The notes will be callable at par on any contingent coupon payment date.

“It’s almost a four-year note and you don’t have a non-call period,” he said.

“This also adds some more premium.”

The same barrier level applies at maturity. Investors will receive par plus the final coupon unless either ETF finishes below the 60% barrier level, in which case they will lose 1% for each 1% decline of the least-performing ETF, according to the prospectus.

A balancing act

A call option made a big difference in pricing compared to the standard automatic call, explained the market participant.

“With an autocall, the investor doesn’t have to worry about interest rates. As long as the stock stays down, it’s not going to be called,” he said.

When the issuer has the discretion to call, a drop in interest rates would suggest a likely exercise of the option. But it is not always the case.

“The benefit of calling the notes has to outweigh the benefit of not calling. It’s a balancing act” he said.

“Sometimes interest rates dictate the decision to call. Sometimes the market does.

For instance any time the coupon barrier is breached during a sell-off represents one less coupon payment for the issuer to make, he explained.

“So long as it’s not called, the investor is still taking equity risk...they’re still short the stock. The investor may win on the interest rate side of the equation and lose on the equity side,” he said.

“It’s a zero sum game and you give the issuer more control when you allow them to call the notes anytime they want which they can do here.”

For that option the issuer compensates the investor with a much higher yield, he noted.

Zero correlation

The two underlying funds showed no particular relationship. Their coefficient of correlation is 0.07.

This does not mean the two funds have a negative correlation. But they are not more likely to move together either, which creates additional uncertainty for investors whose risk exposure decreases when correlation is high.

“This is how they keep the high premium as well,” he said.

Bespoke

An industry source looking at the two underlying sectors – gold miner stocks and biotechnology companies – said the exposure was unusual.

“If an investor has a specific view on both asset classes it’s a way to get a relatively high-coupon yield,” he said.

“But it’s not the natural exposure the average investor would go after.

“I don’t think it’s a best-effort deal, one when manufacturers create a product and put it out there up to a bid. I think it’s probably more like a client asking for a particular exposure to get some yield...some kind of reverse inquiry.”

Barclays is the agent.

The notes are expected to price on Friday.

The Cusip number is 06744CFB2.

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