Barclays' one-year notes with 20% buffer tied to nine stocks aimed at blue chip investors

By Emma Trincal

New York, Jan. 10 - Barclays Bank plc's 0% notes due February 2013 linked to a basket of equally weighted stocks and American Depositary Shares offer an attractive potential return for slightly conservative and somewhat bullish investors, sources said.

"For people moderately bullish and willing to take a small amount of risk, it's reasonable. It's a good structure," said Lee Kramer, president of Capital Management Analytics.

The notes provide two times the return of the underlying basket at maturity subject to a cap of 14% to 18%. An 80% barrier protects investors against losses on the downside, according to a 424B2 filing with the Securities and Exchange Commission.

The underlying companies are Berkshire Hathaway Inc., Comcast Corp., Freeport-McMoRan Copper & Gold Inc., MetLife, Inc., Procter & Gamble Co., Royal Dutch Shell plc American Depositary Shares, Sanofi American Depositary Shares, Seagate Technology plc and Vodafone Group plc American Depositary Shares.

Blue chips

The choice of the underlying basket was seen as a positive for relatively risk-adverse investors.

"It's a pretty conservative basket. It's made of pretty stable, blue chip companies," said Kramer. "It's well-diversified. The probability of the basket dropping by more than 20% is relatively low."

Kramer said that he also liked the stock picks within the basket.

"The basket includes several beaten up European blue chips - big pharmaceutical, big oil company, big telecom - that have an average dividend yield of 4%. It's very attractive as it provides support for the share prices," he said.

He was referring to health care company Sanofi; Royal Dutch Shell plc in the energy sector and Vodafone Group plc in the telecommunications industry.

"The U.S. stocks [in the basket] are not oversold at the exception of Freeport-McMoRan, a nice commodity play," he added.

"The stock was beaten down on fear of a global recession but we now have a decent amount of recovery potential as China is easing its monetary policy, which may spur demand for industrial metals including copper," he said.

Kramer said that he also liked cable company Comcast Corp. because it had upgraded its network and freed up some cash flow.

Procter & Gamble, Kramer noted, was also a good choice for its "nice dividend yield" and the fact that reduced commodity prices have helped the bottom line.

"It's a good selection," he said about the basket of stocks.

There was only one exception.

"I'm not crazy about Seagate. The stock has rallied because people have been covering their short positions and value investors have been buying up shares. But in the long run, sector trends are working against them. Hard drives will go away over time and will be replaced by memory chips," Kramer said.

Thomas Livingston, director of structured products at Halliday Financial Group, said that he too liked the underlying basket.

"I like the dispersion over the industries. You've got tech, oil, international companies, Buffet. It's a mini-S&P, well-diversified basket," he said.

Leverage for mild bulls

The leverage gave a chance for investors with a modest growth outlook to pocket attractive gains.

"If you expect single-digit returns for 2012 as I do, this deal makes sense. It's not a bad deal at all," said Livingston.

Kramer agreed.

"The notes allow mild gains to be magnified up to the cap, which combined with the knock-in buffer is attractive although the net gain is capped. I wouldn't expect the gain of the basket to exceed the cap by much in a best-case scenario anyway, so the leverage and buffer are nice features."

Limited protection

The disappointing element in the product was the downside protection. Sources said that having a barrier rather than a buffer introduced more risk in a market likely to remain highly volatile.

"My only issue is the 20% protection. It's more like a reverse exchangeable with a cap. It's a knock-in at 20%. If it goes down beyond 20%, you're subject to all the losses from the starting original point," Kramer said.

"It's not as conservative as a static buffer. If there was a huge sell-off, you could lose quite a lot of money.

"That's why for the most conservative investor, I wouldn't recommend it."

Livingston said that chances of a 20% correction were real for 2012 although it didn't mean investors should not take any risk.

"You could get a 20%, 25% correction. We've had plenty of that over the past year. So there is a risk but there is no way outside putting your money in a pillow you can totally escape risk. You can't plan your future on the world end," he said.

The inclusion in the basket of the three American Depositary Shares contributed to render the future performance more unpredictable.

"The reason the three European companies are in there is that it gives you some volatility," he said. "You can get the pricing that way. European share prices are pretty scary right now."

Ultimately, the notes represent a "call on the market direction," he said.

"This is not a bad deal at all, but personally I would have liked to get more protection," he said.

Barclays Capital Inc. is the agent. The notes will price and settle in January. The Cusip is 6738KH53.

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