Barclays' CDs tied to basket of commodity sub-indexes offer 'fair' coupon but complex formula

By Emma Trincal

New York, Aug. 8 - Barclays Bank plc's upcoming certificates of deposit due Aug. 30, 2017 linked to a basket of 10 commodity sub-indexes may deliver an attractive digital payout, but the formula to calculate the coupon is too complex for some.

The equally weighted basket components are the S&P GSCI Sugar Index Excess Return, the S&P GSCI Coffee Index Excess Return, the S&P GSCI Cocoa Index Excess Return, the S&P GSCI Corn Index Excess Return, the S&P GSCI Cotton Index Excess Return, the S&P GSCI Gold Index Excess Return, the S&P GSCI Lead Index Excess Return, the S&P GSCI Aluminum Index Excess Return, the S&P GSCI Nickel Index Excess Return and the S&P GSCI Zinc Index Excess Return.

The notes will pay a coupon each August equal to the sum of the performances of the indexes, subject to a floor of zero, according to a term sheet.

If an index's return is zero or positive, its performance will be fixed at 7% to 11%. If an index's return is negative, its performance will be the greater of the index return and negative 20%.

Investors will receive par at maturity.

"I like it," said Carl Kunhardt, wealth adviser at Quest Capital Management.

Kunhardt said that he likes the principal-protection feature even if the risk for the CD is to never earn any interest.

The disclosure supplement warned that investors should be willing to accept that they will receive a coupon on any given year only if the arithmetic average of the basket components' performances is positive.

"Worse-case scenario: I'm getting my money back and I just gave up on the potential for growth," Kunhardt said.

Good diversification

The underlying asset class - commodities - as well as the composition of the underlying basket offer a desirable level of diversification, Kunhardt said.

"It fits into the broad asset allocation. There is little to no correlation with cash, bonds and stocks," he said.

"It's also broadly diversified internally. There's not much correlation between those commodities. You have staple commodities, like coffee. You have precious metals. It's good diversification all the way around."

Digital payout

Kunhardt noted that the digital payout is also "a positive" because even if a basket component shows a flat return, its performance will be recorded as at least 7%, which gives the actual return a boost.

Because each sub-index performance is capped, the overall interest payment is capped as well. But Kunhardt said that "a 7% to 11% interest is fair."

"You have the potential for either bond-like returns on the low end [or] equity-like returns on the high end," he said.

Kunhardt said that because the CDs are a structured investment, investors still need to look at the creditworthiness of the issuer.

"Barclays is as good as it gets. I'm comfortable with that name," he said.

"To be sure, they have some exposure to some of the toxic sovereign debt in Europe, but they're not among the banks with the highest level of exposure.

"Barclays is one of the strongest banks in the world.

"The only thing I don't like is that it's such a long maturity. But other than that, it fits the bill of all the things I want from structured investments."

Not an easy sale

On the distribution end, however, not everyone finds the product appealing.

"It's principal protected, so at least you get your principal back," a distributor said.

"But the calculation formula to me is a turn-off. You have a complex method to calculate your coupon. And you have 10 items in the basket. That's a lot. I'm not sure the investor can get their arms around it. It's way too complicated.

"Why didn't they do a point-to-point? I have no idea. Perhaps they tried and couldn't price it.

"Sometimes the people who structure the products are not the people who do the marketing. They forget that somebody has to sell it."

The CDs (Cusip: 06740AQD4) are expected to price Aug. 25 and settle Aug. 31.

The exact terms will be set at pricing.

Barclays Capital Inc. is the agent. Advisors Asset Management, Inc. is the distributor.

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