Barclays jumps on the MLP ETN bandwagon with sale of $250 million ETNs

By Emma Trincal

Investors gained an additional opportunity to get exposure to master limited partnerships (MLPs) via Barclays' first ETN tied to the popular asset class, which priced Thursday.

Barclays Bank plc registered to sell up to $250 million of 0% iPath S&P MLP exchange-traded notes due Dec. 15, 2042 linked to the S&P MLP index, according to a 424B2 filing with the Securities and Exchange Commission.

The S&P MLP Index was created in 2007. It provides investors with exposure to the leading partnerships that trade on the NYSE and NASDAQ. The index includes both master limited partnerships (MLPs) and publicly traded limited liability companies (LLCs), which have a similar legal structure to MLPs and share the same tax benefits, according to Standard & Poor's.

First use of the index

Vinit Srivastava director, strategy indices at Standard & Poor's, told Prospect News that it is the first use of this index in an exchange-traded product.

"We licensed it to State Street in September for an index fund. But to my knowledge, it has not been used in a structured note before. And it's the first use in an ETN," he said.

The overwhelming popularity of MLPs, especially among income investors, has led some issuers to suspend or limit their issuance of shares, sometimes in order to maintain their hedges, sources said.

"We just saw consistent demand from investors, as MLPs represent an alternative asset class that can provide higher yields," a market participant said.

"The appetite for these products is greater than ever especially since the JP Morgan Alerian ETN capped last year," he noted. JP Morgan's decision last June to suspend the issuance of its Alerian ETN shares may have encouraged Barclays to launch its first MLP ETN, sources said.

One month after JP Morgan's announcement, UBS rolled out its own version of the product with its ETRACS Alerian MLP index ETN.

Surging demand

The MLP universe is estimated to be $330 billion, this market participant said.

"There's a growing demand and we've seen a lot of interest for MLPs. The biggest attraction factor is the yield due to their unique structure," Srivastava said.

"MLPs are required to pay a certain portion of their earnings as redistribution, which is why you get such high yields."

As of Dec. 31, the annualized yield on the index is 6.03%, he said.

"In addition, a lot are infrastructure MLPs, which provide a steady cash flow, something that investors have a great appetite for."

"They also give you administrative advantages because you get with an ETN a 1099 versus a K1 when you invest directly in the MLPs."

This explains why ultra-high-net-worth investors "who typically access the space directly" are increasingly attracted to ETNs, said the market participant.

But the main factor, which draws investors from ETFs to ETNs is the tax efficiency, he added.

Finally, the recent shale gas and energy boom in the United States has also encouraged investors to get exposure to this sector. The S&P MLP index has a nearly 98% allocation to energy, with the rest allocated to utilities.

Crowded space

"There are a lot of products, a lot of ETNs and ETFs," said Srivastava.

"[The new ETN] competes with others, especially the Alerian, which tracks the same space," he said.

He referred to the most popular tracker product in the MLP asset class, JPMorgan Chase & Co.'s ETN linked to the volume-weighted average price level of the Alerian MLP index, created in 2009.

Two years later, UBS AG, Jersey Branch brought to market its ETRACS Alerian MLP Infrastructure index ETN, which offered the advantage of tracking a high-yielding subset of the MLP universe, including energy transportation and storage.

Credit Suisse AG, Nassau Branch is also in the MLP market with its ETNs linked to the Cushing 30 MLP index as well as Morgan Stanley with its Cushing High Income index ETN.

"The space is crowded. It's challenging. Maybe they'll have a magic formula that will work," an industry source said.

"It's not very different from other products. We've seen a lot of money getting into MLPs, so Barclay's is trying to get into the game," the sellsider said.

Broader index

Srivastava said that the underlying index may be unique and competitive compared to others due to the weightings rules applied to construct the index.

"Right now the index has 56 MLPs but we don't have a limit in the number of constituents," he said.

"Our goal is to offer a diversified index and to avoid excess concentration in one, two or three names as it is sometimes the case with other MLP indexes.

"As long as a MLP satisfies our criteria based on market capitalization, liquidity, type of sector and other considerations, it is qualified and it is part of our index. In addition we apply strict weighting rules: no name can represent more than 5% of the index and the sum should not be greater than 45%. It allows you to avoid having three big MLPs of 15% each with a 45% concentration in just three stocks. We want to avoid that."

The market participant said that it is challenging to enter a very competitive field but that Barclays had good reasons to do it at a time when investors are looking for income and tax efficiency.

But an encouraging sign may be the choice of the underlying index.

"It has the potential to be a true broad benchmark in the space", the market participant said.

According to Srivastava, there are between 80 and 100 listed MLPs in the U.S. at the present time.

The Alerian index has 50 constituents. The Alerian infrastructure index is composed of 25 stocks and the Cushing index has 30 names.

The iPath ETNs priced on Thursday and began trading on the NYSE Arca under the ticker symbol "IMLP."

The issuer sold a portion of the notes at par of $25 on the inception date and will sell the remainder from time to time at varying prices.

Barclays is the agent.

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