Barclays has 'high ambitions' with its Level-Pay Notes targeting retirement income portfolios

By Emma Trincal

New York, Aug. 30 - Barclays Capital Inc. completed the sale of its first series of Retirement Income Notes, a new income product designed for investors approaching retirement. The bank set the price on Friday after taking orders all week, and a sellsider said that "[Barclays] had a good response."

Level-Pay Notes and Inflation-Indexed Level-Pay Notes are the first two products in the Retirement Income Notes suite launched last week by Barclays. Both convert a lump sum into a stream of monthly payments.

Issuance is set for Wednesday.

Good response

Pradeep Jhanjee, head of rates structuring, Americas, at Barclays, said during a conference call just before the launch that "We have fairly high ambitions for this product because we think it's timely."

Barclays' Retirement Income Notes seek to offer an "efficient, transparent and flexible alternative for people looking for ways to generate a steady stream of payments over time," Leo Clark, director of rates structuring, Americas, at Barclays told Prospect News. "To our knowledge there is nothing else out there exactly like this."

Barclays priced a total of eight offerings: four Level-Pay Notes and four Inflation-Indexed Level-Pay Notes, with 15-, 20-, 25- and 30-year tenors, according to a new web site launched by Barclays at www.barcap.com/RINotes.

Clark said that Barclays created the site to maintain each month a list of new Retirement Income Notes products on the shelf as well as indications of bids and offers for secondary offerings.

The bank intends to issue the Retirement Income Notes in a regular monthly program, he said.

The next issuance date is expected to be in October.

Clark declined to specify the amount sold last week, but a filing on the Securities and Exchange Commission web site is expected Tuesday.

A different breed

"This product is different relative to many other investment products that are currently available in the market," Clark said. "Many products are designed for people who are trying to maximize the growth of their assets in what's referred to as the accumulation period. This product is for the 'de-cumulation' period. It's for people who are approaching or are in retirement, as those investors may have shifted their focus from maximizing the growth of their assets to optimizing the drawdown of their assets."

Benefits of amortization

The benefit of an amortizing note such as Barclays' Level-Pay Notes compared to a traditional bullet bond is cost-efficiency, according to a market participant. "It costs you less upfront," this market participant said.

He took the following example: An investor needs $400 a month over the next 15 years and has the choice between a 15-year Level-Pay Note, which pays $100 per month per note, and a 15-year bullet bond paying a 4% annual coupon.

In order to get a $400 income each month, the investor choosing the Level-Pay Note would need to buy four notes since each note provides a $100-per-month income payment, the market participant explained.

One of the recently priced $13,400 Level-Pay Notes with a 15-year maturity displayed on Barclays' web site gives investors a $100 monthly income for 15 years with this face value.

In order to get the desired $400 monthly income, an investor would need to buy four notes for a $53,600 total cost.

In comparison, an investor in the bond carrying a 4% coupon would need to invest a total of $120,000 up front in order to generate the $4,800 annual cash flow required for the desired $400 monthly income.

"With this structure, you are spending down your capital but in a way that fits your cash-flow needs," the market participant said.

If the regular bond gives investors 100% of their principal back at maturity, it also requires them to invest much more capital initially in order to cover their everyday expenses, a solution that is not always available to all, he explained.

Simplicity and flexibility

Besides cost-efficiency, the product was also designed to be more transparent and more "straightforward" than comparable products used for retirement income, said Clark.

"Level-Pay Notes are constructed to pay $100 per note. You want $400 per month, you buy four notes. You get the same amount each month, subject to issuer credit risk," he said.

The Inflation-Indexed Level-Pay Notes are for investors who want to cover fixed living expenses that might rise with inflation. They provide inflation-adjusted payments of $100 a month until maturity, equal to $100 times the Consumer Price Index ratio, according to FWP filings.

Finally, the notes are more "flexible" than insurance annuities. They offer the advantage of being tradable and transferable, said Clark.

"If you have unforeseen circumstances, you may be able to sell the security to someone else," he said.

Assets and liabilities

While the Retirement Income Notes have been designed with the needs of retail investors in mind, some anticipate an interest on the part of institutional investors as well.

Pension plans, for instance, may find instruments providing a stream of steady payments useful when managing or hedging their long-term liabilities, Clark said.

In addition, asset managers may find the new products useful for the reinvestment of assets invested in target-date funds as the need to generate steady cash flow increases as the target date approaches, he added.

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