Barclays market plus notes tied to Euro Stoxx offer absolute return-like component, source says

By Emma Trincal

New York, April 17 - Barclays Bank plc's 0% market plus notes due Oct. 21, 2015 linked to the Euro Stoxx 50 index provide an alternative to leverage when investors want to avoid a cap, sources said.

In addition, the possibility of obtaining a positive return in a down market offers an attractive form of absolute return payout, they noted.

If the index finishes at or above the 80% barrier level, the payout at maturity will be par plus the greater of the 2.5% contingent minimum return and the index return. If the index finishes below the 80% barrier level, investors will be fully exposed to losses, according to a 424B2 filing with the Securities and Exchange Commission.

Outperforming the index

Steve Doucette, financial adviser at Proctor Financial, said that what he likes in the product is the opportunity to outperform the benchmark. Timing is also appealing as bulls are turning cautious after five years of an up market.

"If you're somewhat bullish but expect a market pullback in the next 18 months, you enjoy some downside protection. It's more than just getting par back," Doucette said.

"If the index is down 20%, I'm getting this 2.5% return. That's alpha. In theory, I could outperform the Euro Stoxx by 22.5%. If you're slightly bearish, that's a good thing."

No cap, no leverage

Many notes feature leverage up to a cap. In contrast, this one provides no leverage and no cap.

"The way this one is done is different. It is a unique structure. I haven't seen these," he said.

"You're trading the leverage for the no-cap.

"It's always a dilemma to decide which way you want to go, and I guess it depends on the terms you can negotiate.

"A question I would have is, if I give up the 2.5%, can I get some leverage on the upside?

"If you think the market might continue to go up, then having no cap is good. This note works if you're bullish but cautious and you still want protection. This minimum return enables you to outperform on the downside with a positive return even if the index is down. That's unusual. You get more range to outperform the index."

Timing

Even bullish investors should be thinking of a potential market pullback based on historical levels, he said.

"What I like about the notes is that you can be straight long the index on the upside with no cap and if you're wrong, you have the protection. If you are concerned about a pullback, as you should be based on the historical levels of the market, you have that protection. So you can be wrong in one or the other," he said.

Doucette said that he cannot predict if the market will go through a correction in the next 18 months.

"But the odds are that it will. This bull market is more than five years old. Bull markets do not last indefinitely," he said.

"It's a reasonable note. I kind of like it. You're not giving up anything on the upside, and they're giving you this absolute return component if the index is down. If it's down 20%, you still get 2.5%."

The notes could be appealing to bulls who cannot predict when the market will turn bearish.

"It's a timely note to take a look at and see if it fits what you think is going to happen in the market. It could be just the right timing," he said.

Bullish on Europe

Matt Medeiros, president and chief executive of the Institute for Wealth Management, said that he likes the underlying index. The structure, he said, is also appealing because it offers a shift away from the traditional leveraged capped model.

"I think it's a very interesting note," he said.

"I like the Euro Stoxx 50. Europe shows some continued improvement. I believe that the euro zone still has some growth potential.

"I like the allocations in financials, industrials and energy that make about half of the Euro Stoxx index."

Replacing the common upside leverage with a minimum return of 2.5%, even if the index is negative as long as the barrier is not breached, is a more enticing form of return enhancement, he said, because it offers investors more than their principal back on the downside and eliminates the cap.

No cap, please

"With respect to the terms, I'm not a big fan of leverage when you have the cap. In this case, I don't mind being long the index, and I prefer to do so without the cap. Another good aspect of this structure is the fact that it's an 18-month, which is short-term in nature," he said.

"If you don't exceed the barrier, this minimum payout of par plus the coupon seems very attractive in a down market.

"For instance, being able to give your clients a 2.5% gain if the Euro Stoxx falls by 10% is certainly a big plus.

"I like the structure. I like the fact that it's uncapped."

Medeiros said that he often avoids leveraged notes because they often come with a cap.

"I wouldn't buy anything that had a cap," he said.

"I just don't want to take equity risk if I can't get the full reward for it.

"I don't know what other buysiders feel about that, but for me, when I discuss deals with the sellside, bringing up the cap quickly ends the conversation."

Barclays is the underwriter. JPMorgan Chase Bank, NA and J.P. Morgan Securities LLC are placement agents.

The notes were expected to price Thursday, and they will settle Wednesday.

The Cusip number is 06741UCM4.

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