Barclays' $143.25 million capped participation notes linked to gold topped last week in size

By Emma Trincal

New York, Oct. 3 - A renewed interest in gold and a simple structure made Barclays Bank plc's $143.25 million of 0% capped participation notes due Oct. 9, 2013 linked to the precious metal the largest deal of last week.

The notes do not leverage the upside; instead, they provide for 15% contingent protection on the downside, according to a 424B2 filing with the Securities and Exchange Commission.

The payout at maturity will be par plus any percentage increase in the price of gold, subject to a maximum return of 17.5%.

Investors will receive par if the price of gold falls by up to 15% and will be exposed to losses from the initial price if it falls by more than 15%.

"It's a commodity play, short maturity. People are unsure of what to do. It's similar to a reverse convertible in a way, except that you don't get paid a coupon," an industry source said.

KISS

For this source, complex and innovative structures have little appeal among retail investors. Deals that sell, as this one, often owe their success to their simplicity.

"I'm a big proponent of the KISS principle: keep it simple, stupid. It's a one-year. If it's up, it's a one for one up to a cap. I can get up to 17%, and I'm covered on the first 15% if it's down. It's simple and it's easy to understand," he said.

While the product happened to be a commodity note, its appeal was similar to that of the big equity index-linked offerings that hit the market last week.

Bank of America Corp. for instance priced $130.52 million of 0% Accelerated Return Notes due Nov. 27, 2013 linked to the S&P 500 index. This trade focuses on enhancing returns with a three-times leverage factor, a 16% cap and no downside protection. But there again, simplicity was key, according to a sellsider.

"People like those kinds of deals with an easy-to-understand structure that's been tried and tested. When the market is up, they're rolling deals," he said.

"These large offerings are probably driven by a big roll from last year, a 12-month or 14-month product. You had a busy summer last year.

"And of course, it's also education. More clients are getting involved in structured products."

Gold bugs

Gold, which rallied strongly in the first quarter, fell in April and May before trading sideways until the end of July. Since then, its price has gone up again, leading to a 16% return year to date.

"Investors are buying up gold again. Gold has regained momentum with the recent QE3 and the inflation buzz that followed," the industry source said.

"There haven't been a ton of structures successfully linked to gold recently. In these times of uncertainty, the precious metal offers an attractive potential for investors as an underlying," he said.

During this year's first-quarter rally, Bank of America sold a series of large deals linked to gold in sizes ranging from $38.5 million to $66.5 million. The bid on gold-linked notes has only regained traction recently.

The second largest gold offering since June also priced last week, Bank of America's $44.06 million of 0% Capped Leveraged Index Return Notes due Sept. 30, 2014 linked to the spot price, according to data compiled by Prospect News.

Barclays was the underwriter of its $143.25 million deal last week with JPMorgan Chase Bank, NA and J.P. Morgan Securities LLC acting as dealers.

The notes (Cusip: 06741THL4) carried a 1% fee.

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