Barclays' $33.17 million 9% STEP Income Securities linked to Deere seen as pure income play

By Emma Trincal

New York, Sept. 21 - Barclays Bank plc's $33.17 million of 9% STEP Income Securities due Oct. 1, 2012 linked to the common stock of Deere & Co. are for investors looking for yield in a low interest rates environment, sources said.

The issue was the third largest offering to price last week, according to data compiled by Prospect News.

If the price of Deere shares finishes at or above the step level - 109% of the initial price - the payout at maturity will be par of $10 plus 6.72%, according to a 424B2 filing with the Securities and Exchange Commission.

If the stock finishes at or above 95% of the initial value but below the step level, the payout will be par. Investors will be exposed to any losses beyond the 5% buffer.

Income sought

"People are looking for income. That's the best way to describe this deal," said Kirk Chisholm, principal and wealth manager at NUA Advisors.

"It's also probably for investors who want exposure to the stock. If Deere doesn't go up by more than 15.72%, it's a good way to outperform the stock," he said.

The 15.72% return is equivalent to a cap, he said. It equals the 9% coupon plus the contingent payment of 6.72% if the stock price hits the step level.

"This is for someone who wants to invest in the sector but who thinks that the stock return will be flat, maybe up a little bit but definitely not more than 15.5%," he said.

A sellsider agreed that the main purpose of the notes is to enable investors to get higher income than what the market delivers.

"You're getting high yield, and you're giving up some of the upside," he said.

"It's some sort of stock replacement because a 5% buffer doesn't give you that much of a cushion really compared to a straight investment in the security.

"You're getting potentially 15%, and you're giving up all the upside. You want the coupon, not the participation to the growth."

Investors in the notes must forgo the stock dividend they would earn if they invested in the security directly.

Deere pays a 2% annual dividend, the sellsider noted, adding that what Barclays is really paying is a 7% yield above what the stockholder would receive.

"You have the potential of getting another 6%, but you're giving up anything above that. It would work if the stock traded range-bound," he said.

37.5% realized volatility

This sellsider said that swapping upside potential for high income poses some risk if the downside is barely protected, as it is the case, in his opinion, with the 5% buffer.

He said that Deere has a 100-day realized volatility of 37.5%, which, he added, implies share price moves of more than 2% a day on average.

"That's not meaningless," he said.

"Plus you never know what's going to happen in a stock. Look at BP."

Chisholm said that the stock outlook for Deere is good. What is more unpredictable is the economy and the market as a whole, he said.

"Deere is a good company. If you have inflation, agriculture should be the beneficiary of that," he said.

Deere manufactures and distributes a range of agricultural, construction and forestry equipment.

"Globally, there's certainly a push for increasing farmland and food supplies, so that should create continued demand for the equipment that Deere produces," he said.

"However, if we go into a recession, there are very few companies that will do well."

Bank of America Merrill Lynch is the agent.

The fees were 1.75%.

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