Barclays' $63.24 million notes tied to S&P 500 target mild bulls, offer alternative to ETFs

By Emma Trincal

New York, Nov. 9 - Barclays Bank plc's $63.24 million offering of 0% Accelerated Return Notes due Jan. 11, 2013 linked to the S&P 500 index enable less bullish investors to express a more moderate view on a market characterized by reduced growth expectations, sources said.

The offering was the largest one priced last week.

In addition to the timely structure, a factor behind the success of the deal was that leveraged deals, like this one, may provide alluring alternatives to exchange-traded funds, sources also noted.

"Sixty three million, it seems like a pretty good deal," said Bill Thatcher, principal at Mercer Investment Consulting.

The payout at maturity will be par of $10 plus triple any gain in the index, up to a maximum return of 21.18%, according to a 424B2 filing with the Securities and Exchange Commission.

Investors will be exposed to any index decline.

The deal priced on Nov. 2 at an initial level of 1,237.90 for the underlying benchmark.

Sideways

"I think no one knows where the S&P 500 will be a year from now or 14 months from now," said Thatcher.

"I see the benchmark trading in a range. I don't anticipate a big recession like 2008 because everything is so low now compared to 2007.

"That's probably the view held by people who bought this note. They see the S&P 500 trading in a range looking forward."

The leverage factor and the cap explain why only mildly bullish investors would be interested in the notes, Thatcher said.

Because returns are capped at 21%, investors do not expect the S&P 500 to grow above 7% at the end of the 14-month period, he said.

The prospectus makes it clear when it said that investors "should anticipate that the index will increase moderately" at the end of the term.

Leveraged notes with no downside protection have been popular among investors most of the year, although the demand for buffers has recently increased, according to data compiled by Prospect News.

Pure leveraged structures with full exposure to losses made for 17% of the total issuance volume for the year as of Oct. 31, according to data compiled by Prospect News.

Last month, this percentage was only 10.5%, a sign that risk aversion increased.

But sources said that demand for non-protected enhanced notes is great in general as they give the moderately bullish investor an alternative to leveraged ETFs.

Asymmetrical payout

In exchange for a capped upside, investors in leveraged structured notes get an asymmetrical risk/return profile, which is "very attractive," a distributor of structured products said.

It consists of a 300% participation rate on the upside and 100% participation on the downside.

"It can be an alternative to a three-times leveraged ETF," he said.

"In the ETF, it's three times up and three times down; your losses are leveraged too.

"I guess that's what made this kind of deal so popular."

No daily reset

Another benefit when compared to an ETF is the point-to-point payout offered by the notes.

"It makes a big difference, believe me," said Thatcher.

That is because an ETF seeking three times the return of an index will compute the leverage each day based on the net asset value of the index. Due to the compounding of daily returns, investors often notice differences in amount and possibly direction between the fund and the underlying index, especially for longer periods of time, Thatcher explained.

"Leverage ETFs are having lawsuit problems because you're getting the daily return, not a return from beginning to end," he said.

"People don't realize that, and they're suing the ETFs when they realize they're making less than three times the index point to point.

"If the S&P 500 is up 10% after one year, a structured note like this one will give you 30%. You just won't get that with a three times leverage ETF."

Bank of America Merrill Lynch was the agent.

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