Barclays prices largest S&P 500 Dynamic Veqtor deal to date with $23 million issue of notes

By Emma Trincal

New York, June 22 - Barclays Bank plc priced $23 million of notes linked to the S&P 500 Dynamic Veqtor Total Return index - the largest offering based on the relatively new index since the pioneering benchmark was used as the underlying of a publicly registered note for the first time in March.

The 0% notes are due June 18, 2015, according to a 424B2 filing with the Securities and Exchange Commission.

The payout at maturity will be par plus the index return minus an investor fee of 1.15% per year. Investors will be exposed to any losses.

The notes are putable at any time.

Biggest offering

"This transaction is the most recent, and largest, in a series of notes linked to the S&P 500 Dynamic Veqtor index," Samson Koo, director and head of equity derivative structuring, Americas at Barclays Capital, told Prospect News. "The S&P 500 Dynamic Veqtor strategy dynamically allocates between the S&P 500 and S&P 500 VIX Short Term Futures index, providing investors with an efficient way to get an S&P 500-based equity investment potentially enhanced by investable volatility."

The index is sponsored by Standard & Poor's and allocates a greater proportion of its notional value to investments in the U.S. equity markets during periods of low market volatility and can allocate a greater proportion of its notional value to investments in a reference asset that tracks implied volatility during periods of high market volatility, according to the prospectus.

The index also incorporates a "stop loss" feature that shifts the entire value of the index to a cash investment under certain exceptional circumstances, according to the filing.

Barclays priced its first deal using the S&P 500 Dynamic Veqtor Total Return index in March. It was a $5.85 million issue of 0% performance-tracking securities due March 28, 2013. The payout at maturity will be par plus the index return minus an investor fee of 1.25% per year. UBS Financial Services Inc. and Barclays Capital Inc. were the agents.

Since then, Barclays has priced seven deals linked to the index, according to data compiled by Prospect News, totaling $18.22 million. But none of those deals exceeded $3 million in size.

Volatility trend

"We think the size of this issue shows the continuation of investor interest in volatility-linked products, like the Barclays VXX and VXZ iPaths first issued in January 2009," said Koo. "We also think this demonstrates an increase in awareness by the investment community on the S&P 500 Dynamic Veqtor index. It is a relatively new investable index with unique attributes."

VXX and VXZ are the ticker symbols for two iPath exchange-traded notes issued by Barclays: the iPath S&P 500 VIX Short-Term Futures ETN and the iPath S&P 500 VIX Mid-Term Futures ETN, respectively.

"Investor interest in this relatively new investable index follows prevalent themes in the industry on transparency, simplicity and liquidity," said Koo.

"We think investors could view this note as an attractive alternative to the S&P 500."

Volatility hedge

The index is premised on a couple of historical observations, according to the prospectus, which separately warned investors that "there can be no assurance that the rules used by the index will accurately predict market volatility over time."

Two of the main observations stated in the prospectus are the fact that volatility in the equity markets tends to show a negative correlation to the U.S. equity market and that rapid declines in stock prices usually come with particularly high volatility in the markets.

Based on those rules, the index is designed to provide a "volatility hedge," according to the prospectus.

New dimension

"I like it. A dynamic rules-based index that adjusts your equity exposure based upon volatility I think is a great idea. It would have proven to be performing very well at the end of 2008 and beginning of 2009," said Matt Medeiros, president and chief executive officer of the Institute for Wealth Management.

Medeiros said that the product could be very attractive to retail investors as they have become more familiar with volatility, although they are not fully knowledgeable yet in this new asset class.

"Retail investors are very, very attentive to volatility at this point," Medeiros said. "Intuitively, they know that the equity benchmark will increase in value over time. However, they're apprehensive because of the headline volatility. So I think that a product based on a mechanism that integrates a volatility metrics as opposed to just an underlying asset metrics can be very attractive."

Barclays Capital Inc. is the agent.

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