Barclays' Super Track notes linked to equity basket: good but could be better, sources say

By Emma Trincal

New York, June 14 - Barclays Bank plc's upcoming 0% buffered Super Track notes due June 19, 2014 linked to a basket of two indexes and one exchange-traded fund offer "reasonable" terms even if the issuer could have boosted the product by changing the basket components' weights and increasing the buffer's size, sources said.

The basket consists of the S&P MidCap 400 index with a 50% weight, the Russell 2000 index with a 25% weight and the iShares MSCI Emerging Markets ETF with a 25% weight, according to a 424B2 filing with the Securities and Exchange Commission.

The payout at maturity will be par plus any gain in the basket, subject to a maximum return of 48% to 58%. The exact maximum return will be determined at pricing.

Investors will receive par if the basket falls by up to 15% and will lose 1% for every 1% decline in the basket beyond 15%.

Reasonable terms

"I think the terms are reasonable. If you're going into equity anyhow, here, you're going to have a 15% buffer, which you wouldn't get investing directly," an adviser said.

"You might be sacrificing some upside. But a cap of 16% to 19% per year isn't bad. I don't have a problem with that."

This adviser said that he is also comfortable with the equity mix in the basket. Mid-cap stocks have been the leading market capitalization group over large caps and small caps, and this adviser said that the overweight in mid-cap stocks is acceptable.

"Mid-cap growth has still room to go," he said.

Duration and buffer

This adviser's main objections to the deal are two-fold: the duration and the downside protection.

"If I'm going to take a structured product, I don't like to buy anything longer than two-year," he said.

"It's very difficult to predict six months. And one or two years even more. The shorter the timeframe, the better your chances of achieving success."

The level of protection on the downside is his main concern, he said.

While he is bullish on both U.S. stocks and emerging market equity, the risk of losing capital with these notes is too great, he said.

"I don't like the buffer. I don't do less than 20%," this adviser said.

Rather than buying this structure with a 15% buffer, he said that he would much rather use a different type of structure with a greater "cushion" even if the protection had to be a barrier instead of a buffer.

For instance, this adviser said, he recently bought a one-year callable knock-out note from JPMorgan Chase & Co. offering a 10% coupon and linked to the Russell 2000 index and the Market Vectors Gold Miners ETF.

Investors will get par unless one of the two underlyings falls to or below its knock-in level - 60% of its initial level - during the life of the notes, in which case investors will receive par plus the return of the worst-performing component, capped at a maximum payout of par.

"Of course, it can get called. But a 40% knock-in barrier is great. It's not going to happen in one year. I like the cushion," he said.

Overweight mid caps

Others said they like the structure but that the basket components could have benefited from a different allocation giving more weight to indexes or ETFs that have so far underperformed.

"The 15% buffer is nice if you want to invest in these asset classes," said Frederick Wright, partner and chief investment officer at Smith & Howard Wealth Management.

"But the basket is overweight mid-cap, which is not ideal. That's probably why they're able to offer a decent pricing."

Wright said that the 50% weight in the S&P MidCap 400 index is his main concern with the product.

"Mid caps have outperformed small caps and large caps over not only the last 12 months but also the last three years," he said.

"I would probably prefer a product that is not overweight mid-cap. There is a risk of mean reversion. It's been the most volatile asset class. Granted, the options are probably cheaper, and from the issuer's standpoint, it makes sense.

"But as an investor, I would probably prefer to overweight the asset classes that have underperformed or that have been slightly down."

The notes (Cusip: 06738KTL5) are expected to price Wednesday and settle Monday.

Barclays Capital Inc. is the agent.

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