Barclays' $100.01 million 7% Yeelds linked to Intel stock seen as institutional trade

By Emma Trincal

New York, Jan. 6 - Barclays Bank plc priced $100.01 million of 7% Yield Enhanced Equity Linked Debt Securities due Jan. 27, 2012 linked to the common stock of Intel Corp. in a deal sources said is probably designed for an institutional investor.

The assumption was reinforced by the fact that Barclays priced for the same amount another issue of 7% Yeelds, which had a Jan. 18, 2012 maturity date and was linked to the common stock of Cisco Systems, Inc., according to a 424B2 filing with the Securities and Exchange Commission.

Both offerings priced on Tuesday. Neither carried a fee.

Interest on both notes is payable quarterly.

"I would definitely think it's an institutional investor," said Matt Medeiros, president and chief executive officer at the Institute for Wealth Management. "That's because of the absence of a fee and also the size in relation to that structure."

Two deals

The notes linked to Intel had a face value of $21.10, which is the average execution price per share for the common stock that an affiliate of Barclays paid to hedge the issuer's obligations under the notes, the filing said.

The payout at maturity will be an amount equal to the volume-weighted average price of Intel stock on Jan. 20, 2012. The payout will be capped at 116.8% of par and is payable in cash or Intel stock at each holder's option.

For the Cisco deal, the face value is $20.52. It was calculated on the same basis. The cap is 115% of par, and the payout is also payable in either cash or stock.

"It's probably a niche play for Barclays with a specific client in mind. It was designed for a specific institutional investor, somebody who has already been dictating the terms that they want and they know what they want," said Medeiros.

Interest, dividend

Sam Katzman, chief investment officer at Constellation Wealth Advisors, said that in his view, the notes offered no real advantage over owning the shares since investors are foregoing the 3.5% dividend Intel pays its shareholders without getting adequate protection.

"I could buy the stock and earn 3.5%. They pay 7%. So OK, they give me an extra 3.5%. I'm not sure it's worth taking on the credit risk," said Katzman.

"Plus why go through the extra liquidity risk and get locked up for one year? There's probably not much secondary market, while you can sell a stock anytime."

In addition, having the return capped made the deal "even worse," he said.

"So you're taking all this extra risk - credit risk, lack of liquidity - and you're limiting your upside for just an extra 3.5%? That's not enough for me," he said.

But Steve Doucette, financial adviser at Proctor Financial, said that the interest payment could be seen as the equivalent of some level of downside protection.

"There's no buffer, but really it's a 7% buffer since they're still paying you the interest. If you deduct the 3.5%, you still get a 3.5% buffer," he said.

Doucette said that "what it boils down to" is that investors get a 3.5% cushion for a 16.8% upside potential.

Rationale

"It's a bullish play, most likely from an institution hoping that the stock will rise in price but not too much. And they don't anticipate that much downside either," he said.

Intel's share price has remained flat over the past 12 months, which may encourage some bulls who believe that the stock has the potential to rebound, he noted.

"It may just be a way to get a little bit of income. It's probably a pension looking at collecting a little income by replacing cash," Doucette said.

Overall, Doucette did not think an investor was necessarily better off owning the stock outright.

"A 16.8% cap is not too bad. And if the stock is down 20%, you're still better off than if you had invested directly in the stock since you have that extra 3.5%," he said.

Barclays Capital Inc. is the agent.

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