Barclays' trigger return optimization notes linked to Euro Stoxx 50 designed to beat benchmark

By Emma Trincal

New York, April 1 - Barclays Bank plc's 0% trigger return optimization securities due April 18, 2017 linked to the Euro Stoxx 50 index offer investors an attractive alternative to a direct exposure to the euro zone equity benchmark as the upside leverage and downside protection enable investors to possibly outperform the market, sources said.

If the index return is greater than zero, the payout at maturity will be par of $10 plus 1.5 times the index return, subject to a maximum return that is expected to be 60% to 70% and will be set at pricing, according to an FWP filing with the Securities and Exchange Commission.

If the index return is zero or negative and the final index level is greater than or equal to the trigger level, 75% of the initial level, the payout will be par.

If the final index level is less than the trigger level, investors will be fully exposed to the index's decline from its initial level.

Tom Balcom, founder of 1650 Wealth Management, said that both the leverage and the contingent downside protection are beneficial features for investors.

Long-only replacement

"As a replacement for a long-only position, it makes sense. It's a reasonable play if you want exposure to European equities," he said.

The most attractive term, especially for more moderately bullish investors, is the upside leverage, given the benchmark's recent performance, he said.

"The 1.5 times leverage is nice," he said.

"The three-year annualized return of the Euro Stoxx is only 6%. The five-year, 14%, and it's 6% for the last 10 years.

"The index yielded 30% in the past 12 months. If you think it's an anomaly, you can certainly settle for 17%. A 17% return is phenomenal. No one can continue to clip 30% every year."

The 17% return figure is the compounded maximum annualized return assuming a 60% cap, the lowest end of the 60% to 70% range.

'It works'

Balcom said that over the past 10-year period, the index outperformed 17% five times: in 2006, 2007, 2009, 2012 and 2013.

"But if you think the index had a nice run-up and want exposure to the asset class, the leverage makes sense. And if you worry about a pullback, the barrier gives you a nice protection for that," he said.

The product is well-priced, he said, pointing to some characteristics of the underlying index.

"It works because the Euro Stoxx is more volatile than other indexes, certainly more volatile than the S&P 500 for example, so it makes the terms more favorable," he said.

The implied volatility of the Euro Stoxx 50 index is 17.5% versus 12% for the S&P 500.

"You're also giving up an attractive dividend yield. But that's why they're giving you the leverage. It compensates you for that. In fact, it's likely to more than compensate you for it," he said.

'Fear and greed'

"A lot of our clients are torn between fear and greed. They want to gain exposure to good-performing markets, but at the same time they worry about a pullback. They'll tell us: 'I need to put some money to work because my cash is doing nothing, but I don't want to invest in the market in case it turns over.'

"The barrier in this note allows you to get the exposure with less risk. It's only a barrier, but at least you get protection up to 25%."

One of the responsibilities of advisers is to answer question about the cap.

"You have to explain that you're going to limit your upside to 60% in order to get the 25% downside protection," he said.

"Getting hit with losses will hurt you more than missing out on gains."

Good trade-off

Scott Cramer, president of Cramer & Rauchegger, Inc., said the notes offer a good trade-off.

"If we're going to put money in stocks, and we like this particular market, it gives you a very good balance in terms of downside protection versus the upside," he said.

"I don't think if the index goes up it's going to be linear, and you're getting a reasonable amount of protection. It's not a buffer, but 25% is still very attractive. If there is a 25% sell-off, you'll be glad that you had this."

Cramer added that he likes the upside participation rate in relation to the cap.

"The leverage is very generous on the upside. If you have a 10% gain a year, you get 45% at the end of the term versus 30%. It's a huge outperformance," he said.

"None of these notes constitute the sole ownership of anyone's portfolio, but this one will give you a very good risk-adjusted return."

Outperforming

While the Euro Stoxx 50's recent performance has been "huge," investors should not look at past returns, he said.

"It's not the last year that matters. You want to look at a three-year rolling period. So what if the market goes up 50% at the end of the three years? I still get 60% with the leverage," he said, assuming the same 60% final cap.

"You would get 60% instead of 50% because of the leverage. The true return is 50%. You outperform. If you had a leveraged exposure to the index directly, it would give you 75% but without the protection," he said.

"The trade-off is definitely there.

"Sometimes I see deals and I wonder, why would anyone want to do that? They may not give you enough on the upside, or they may not offer any protection at all.

"This one gives you a good trade-off."

Strong upside

Giving up the dividend is not unusual for structured products investors, he said.

"You don't get the 2.7% dividend in this deal, but nobody is getting the dividend in structured notes. It's all done in options, so compared to other products, the difference is not drastic," he said.

"I think it's a good trade because I don't think you're being limited on the upside. A whole bunch of great stuff would have to happen in order to get the 60% without leverage; you'd have to have 20% a year. What are the chances of that happening?

"The downside protection, while not a true buffer, is strong enough. It's a final barrier, which is good too.

"And in many ways, a three-year note is now considered short-term. That too is a very good thing."

UBS Financial Services Inc. and Barclays are the underwriters.

The notes are expected to price April 11 and settle April 16.

The Cusip number is 06742B162.

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