Barclays' iSuper Track notes tied to real estate ETF offer bet on recovery with income, upside

By Emma Trincal

New York, April 23 - Barclays Bank plc's buffered iSuper Track notes due May 15, 2014 linked to the iShares Dow Jones U.S. Real Estate index fund offer an attractive income play to investors who believe that the real estate market's recovery is on solid ground and that the worst since the 2008 crisis is finally over, sources said.

Noteholders will receive 1% each quarter in the form of a periodic payment, or 8% over the term of the notes, according to a 424B2 filing with the Securities and Exchange Commission.

If the fund's final share price is greater than the initial share price, the payout at maturity will be par plus the fund return, subject to a cap on the fund return of 5% to 9%. The exact cap will be set at pricing. Investors will receive par if the share price declines by 15% or less and will lose 1% for each 1% that it declines beyond 15%.

Muted recovery

"It's a good trade if the underlying index remains flat or moderately higher," said Dean Zayed, chief executive officer at Brookstone Capital Management LLC.

The underlying exchange-traded fund seeks to track the real estate sector of the U.S. equity market as represented by the Dow Jones U.S. Real Estate index, a benchmark comprised primarily of real estate investment trusts.

"I like the duration. I like the fixed coupon," he added. "It's a pretty good short-term bet on a relatively muted real estate recovery."

The fund has gained 2% over the past year and is up 9% year to date.

At $51 per share, the ETF has doubled in price from its low in March 2009. The stock price, however, is still 40% below its high of March 2007.

Zayed said he is relatively comfortable with the downside protection.

"Obviously, a lot of volatility can push the real estate sector lower," he said.

"But if you think that the worst is behind us, and I think that's the case, then 15% is a pretty decent buffer."

Carl Kunhardt, wealth adviser at Quest Capital Management, said the notes offer income for investors who do not foresee much downside risk looking forward.

"If you see U.S. real estate as a sector that has already bottomed out, if you think it's not going to go any lower, the buffer is giving you peace of mind," Kunhardt said.

But he added that "I don't particularly like" the sector.

"There was a lot of excess that still needs to be worked out. Residential started to improve, but commercial real estate is still sluggish," he said.

Coupon + upside

Sources said the major appeal of the notes is the combination of a fixed coupon with some upside, even if the cap is set at a low level. This structure makes the notes fairly attractive to income-seeking investors, they said.

"I haven't seen too many of these," Zayed said.

"For yield-hungry investors, the coupon is attractive, especially on a two-year term."

Kunhardt said he has "not seen a handful" of structures in which the coupon payment was offered separately and in addition to a participation in the upside.

"It makes sense that you would have such a low cap," he said, "since investors get a total of 4% coupon [per year].

"In addition, the low cap enables you to pay for that downside protection. Somehow, it has to be paid for."

Downside risk

Kunhardt compared the notes to other similar two-year corporate names of similar ratings.

"It's the same idea as buying a two-year bond only you get a better yield on this note since you get it at par and the coupon is already pretty high. Most of those corporates trade at a big premium with a much lower yield to maturity," he said.

However, the difference in yield also reflects risk, he noted, adding that he is not certain that the 15% downside protection is adequate based on the nature of underlying fund.

"The only thing I don't like about this two-year is the buffer," he said.

"Real estate has been a pretty volatile sector. The sector has not really recovered in 2009 and 2010. It just stopped falling.

"It's not clear whether prices can go down further. But if they did, a 15% buffer may not be enough.

The notes (Cusip: 06738K3Y5) will price May 10 and settle May 15.

Barclays Capital Inc. is the agent.

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