Barclays, Goldman offer part-protected notes; capital-at-risk sweetens terms, adviser says

By Kenneth Lim

Boston, July 15 - Issuers can offer more attractive terms in products that are linked to volatile underlying assets by taking a few points off full principal protection, an investment adviser said.

Barclays Bank plc and Goldman Sachs Group, Inc. are two issuers who recently announced almost fully principal-protected products.

Barclays priced $13.76 million of zero-coupon 98% principal-protected notes due July 15, 2011 linked to a basket of BRIC currencies.

The basket comprises equal weightings of the Brazilian real, Russian ruble, Indian rupee and Chinese renminbi.

The payout at maturity will be 98% of par plus 1.65 times any appreciation in the basket relative to the dollar, subject to a maximum return of 22.75%. If the basket depreciates relative to the dollar, the payout will be 98% of par.

Barclays also sold $3.66 million of zero-coupon 95% principal-protected notes due July 15, 2011 linked to the same basket.

The payout at maturity will be 95% of par plus 2.55 times any appreciation in the basket relative to the dollar, subject to a maximum return of 33.25%. If the basket depreciates relative to the dollar, the payout will be 95% of par.

JPMorgan Chase Bank, NA and J.P. Morgan Securities Inc. are the agents for both products.

Goldman Sachs plans to price 24-month zero-coupon notes linked to the same basket.

The payout at maturity will be 98% of par plus at least 1.78 times any gain in the basket, up to a maximum payout of at least $1,247 per $1,000 note. The exact participation factor and cap will be set at pricing.

Investors will receive at least $980 per $1,000 note.

Goldman Sachs is also offering a series of notes with the same tenor and underlying, but with 95% principal protection.

The payout at maturity will be 95% of par plus at least 2.9 times any gain in the basket, up to a maximum payout of at least $1,385 per $1,000 note. The exact participation factor and cap will be set at pricing.

Investors will receive at least $950 per $1,000 note.

Volatility workarounds

Offering principal protection on highly volatile underlyings can be expensive for issuers, and investors are unlikely to be interested in products where the potential returns are not eyecatching, an investment adviser said.

"It's a little ironic," the adviser said. "When you need principal protection the most, that's when you find it's the least attractive product in the market."

By taking a few percentage points off the principal protection, issuers can sweeten the terms while still offering protection on most of the principal.

"If you're really confident about the underlying, you might be comfortable with giving up a bit of that principal protection in order to get better returns," the adviser said. "It's really a matter of assessing the risk and potential reward tradeoffs."

Risk appetite improving

Investors' risk appetites are slowing recovering, the adviser said.

"I think there's generally a sense that we could be past the bottom," the adviser said. "There's a bit more clarity in the marketplace and investors are a little more willing to take risks."

That trend could help partially principal protected products to find buyers, the adviser reckoned.

"If you're coming from buying only FDIC-insured CDs or principal protected notes, something that's 95% or 98% principal protected isn't that big of a move compared to a reverse convertible where you could potentially lose a lot of your capital if the underlying stock doesn't do well," the adviser said.

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