Barclays links Coupon Plus notes to S&P; could be attractive but highly risky, adviser says

By Kenneth Lim

Boston, July 7 - Barclays Bank plc's planned SPX Coupon Plus notes linked to the S&P 500 index offers potentially attractive but risky returns in a moderate market, an investment adviser said.

Barclays plans to price zero-coupon SPX Coupon Plus notes due July 26, 2011 linked to the S&P 500.

If the index never closes below 75% of its initial level during the life of the notes, investors at maturity will receive par plus the index return, subject to a minimum return of 12% to 20%. If the 75% barrier has been breached, investors at maturity will receive par plus the index return.

The exact minimum return will be set at pricing.

Volatile underlying

Investors who want to buy the product should be willing to take on a fair amount of risk, the adviser said. The notes have no principal protection, and once the barrier is broken investors are fully exposed to any decline in the index. Furthermore, the barrier offers a rather thin cushion, the adviser added.

"One-year volatility of the S&P 500 is about 40-something percent," the adviser said. "The barrier is only 25%, so it's very possible that the barrier could be breached. The good thing is once the barrier is breached you could still get a positive return if the index climbs back up, but that's quite a gamble because it's going to have to climb up quite a lot."

The notes are also exposed to the credit risk of the issuer, the adviser said.

"That's something you don't have if you're just buying the S&P 500," the adviser said. "Obviously that's something you have to consider as an investor. You're buying the performance of one asset but also the senior unsecured credit risk of another asset."

Direct alternative

Investors who are comfortable with Barclays' credit quality could see the product as an alternative to a direct investment in an S&P 500 index fund, the adviser said. Compared to a fund, the notes have slight downside protection in terms of the barrier as well as potentially superior performance if the S&P 500 goes up only moderately.

"The minimum coupon gives you the potential to significantly outperform the index if it goes up a little," the adviser said. "And you don't give up any gains if the index does better than the minimum coupon, which is better for investors than products that are capped."

But the wide indicative range of the minimum return could make it difficult for investors to properly assess the product, the adviser said.

"A minimum coupon of 12% is very different from a minimum coupon of 20%," the adviser said. "It's a very big range, so where it ends up is going to make a difference. But I think this also reflects how volatile the index is. They need to have such a wide flexibility probably because the market could change so much."

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