Since acquiring Lehman Brothers’ investment bank business and its midtown building in New York for $1.75 billion in 2008, Barclays has been building a solid presence in the US rates structured products space.
According to the bank’s figures, it had almost a 90% share of the agency-capped callable floater market in 2016, having brought $1.22 billion (46 deals) of the $1.37 billion (48 deals) in the capped callable floating rate note sector issued by the Federal Home Loan Banks (FHLB). Barclays says it has held top spot in this market for six out of the past seven years, demonstrating consistency and endurance in rates since the financial crisis. Nevertheless, macro-economic issues have put a strain on the sector.
“Last year was a challenging year in the rates market until the [US presidential] election,” says Rahul Kakar, a director in medium-term notes and structured notes trading at Barclays. “Investors were struggling to get yield. But we stayed close to the market. We continued to make progress and showed consistency.”
The bank also broke fresh ground. For the first time, Barclays began offering a multi-asset investment strategy through its Trailblazer family of indexes, which are designed to build diversified multi-asset-class portfolios for structured products and annuities.
Elizabeth Scanlon, vice-president in equity and funds structured markets structuring at Barclays, says the indexes have proved equally popular with institutional and retail clients. Since it was launched in July last year, the bank has issued around $40 million of notional in structured products linked to the indexes, and two or three “very large names” in the insurance sector are numbered among the buyers.
In addition, three fixed indexed annuity writers have also begun to offer Trailblazer indexes in their annuity products. To help spread the word further, Barclays set up a dedicated Trailblazer website last year to provide information and performance data on the indexes.
But it is hard work that has paid off over innovation. The greater part of the bank’s success is down to its proximity to its structured products clients, which gives it an acute understanding of what they want, says Kakar. “We know our clients and we know what needs are not being met. We know what their yield targets are and we can bring a range of names,” he adds.
For example, in 2016 Barclays was co-underwriter for a $423 million callable zero-coupon bond issued by the International Bank of Reconstruction and Development (IBRD). While this is a big market in Asia, where Taiwanese life insurers have shown an appetite for zero-coupon callables, it has previously been a very small one in the US. In 2016, this was the only IBRD callable zero-coupon bond to have been done in the US.
Another example of Barclays’ expertise was the $75 million capped callable floater it placed for the FHLB in November 2016. It yielded a fixed-rate coupon for the first three years, and one month Libor plus 200 basis points thereafter, callable every quarter. The FHLB has always raised a great deal of its required debt in the callable market, on-selling the call option to reduce the cost of funding.
“The FHL banks have a long-standing relationship with the Barclays capital markets team,” says John Gerli, chief capital markets officer at the FHLB Office of Finance. “Our callable bond program accounted for $70 billion of issuance in 2016 and this transaction is an example of Barclays’ ability to source investor demand for tailor-made portfolio solutions, which provides cost-effective funding for FHLB member institutions.”
As underwriter, Barclays brought Lloyds Bank to the US market via a $10 million fixed-rate callable, and it underwrote the only large fixed-rate callable – to the tune of $50 million – for the International Finance Corporation.
In addition to its primary market capacity, the bank prides itself on being a reliable and consistent presence in the secondary market. This is another capability that sets it apart from competitors, says Kakar. “We are strong in the secondary market, even in paper that our rivals might have underwritten. A lot of our peers don’t do this, but clients are looking for non-benchmark deals to meet their needs and they want support.”
Underpinning the business is Barclays’ Barx platform, which is well regarded on the Street. Clients report finding Barx Comet, designed for pricing and execution of flow structured investments, a real asset. Having access to real-time valuations in a wide array of products and credits is a vital support, they say.
“Clients look to structured notes to solve problems that are not answered in the plain vanilla or benchmark market,” says Kakar. Barclays helps solve those problems better than most.
The week on Risk.net, September 8-14, 2018Receive this by email