Barclays' notes linked to EquityCompass Share Buyback index offer exposure to popular strategy

By Emma Trincal

New York, Feb. 9 - Barclays Bank plc is planning a note that gives investors access to a specific equity strategy, buying the shares of companies that have recently announced a repurchase of their own stock.

Many believe that share buybacks create shareholder value, but others aren't so sure.

Barclays plans to price 0% notes due March 11, 2015 linked to the EquityCompass Share Buyback index on March 6, according to a 424B2 filing with the Securities and Exchange Commission.

The index is named after a strategy that selects a portfolio of stocks of up to 30 companies with the most significant share buyback announcements made in the recent past.

Access

"It's an intriguing note. The underlying strategy allows you to take advantage of the short-term appreciation of share prices. It's a typical event-driven strategy. You're not doing any analysis. It's not your typical buy-and-hold strategy," said Matt Medeiros, president and chief executive of the Institute for Wealth Management.

"This is an investment that people would buy for access to a strategy and not for the structure of the product itself," said Steve Doucette, financial adviser at Proctor Financial, noting that the notes offer no downside protection or enhanced return mechanism.

Cash rich

The perceived value of the strategy is based on the premise that stocks of companies that announce share buybacks may be more likely to perform well because share buybacks are a signal to the market that management believes the company's shares are undervalued, according to the prospectus.

But sometimes companies just don't find any better use for their excess cash, Medeiros said, given the uncertain economic environment.

"A lot of companies have a lot of cash on hand because they improved their efficiency. They don't think now is a good time to make business acquisitions or to invest in the infrastructure. The future is too uncertain," he said.

"They're not going to spend that cash to rebuild the business until they see some momentum.

"The obvious answer is to pay the cash in dividends or repurchase shares. Most companies will pay a bit of increase in dividends.

"Share buybacks are a way to improve your share value in a time when it's going to be hard to build up your business."

Theory and reality

Another reason why stock repurchases may be a popular equity strategy is because investors believe that buybacks generate value by raising earnings per share.

But whether strategic buybacks create long-term value for investors remains an open question among investors.

"If you go back 12 years ago, everybody thought that a share split was a precursor to a stock rise," said Doucette.

"The question is why. The same is true with share buybacks. It's never been proven right. It's good until it doesn't work."

When buying back their own shares, managers of companies typically exchange equity for debt. Some question whether it makes sense to do this all the time.

"This strategy only has value if you believe that companies that buy back shares will add value to the shareholders. I'm not convinced that it does," said Scott Rothbort, founder of LakeView Asset Management.

"Sometimes using cash to buy back shares is not the best use of capital. You may be better off paying down debt or paying dividends.

"Sometimes it helps; sometimes it doesn't."

"In theory, it makes perfect sense," said Doucette.

"If the management of a company tells you there is no better place to invest than in the company itself, they're making a perfect statement.

"The question is whether the theory is realistic."

Filter

The trading restriction filter applied by the EquityCompass Share Buyback model only picks companies that have announced the intention to buy back their common stock in the open market within the previous three months. The index is rebalanced monthly.

"The benefit you get from share buybacks is initially, on the announcement," said Rothbort.

"Since what's put in the index is based on announcements in the past three months, you may already have lost the impact."

"I would be interested in looking at the notes, but I would have to review the index methodology in more detail," said Medeiros.

"My concern would be in the selection process. What if one month you have a lot of buyback announcements and almost nothing the next month?"

Cost, structure

The participation rate for investors in the notes is 97.5%, according to the prospectus.

In addition, investors are also charged a 0.9% investor fee per annum deducted from the index periodic return.

"You have to pay 2.5% upfront and then they're hitting you with another 90 basis points a year," said Doucette. "You get a lot of ground to make up."

The notes are putable subject to a minimum of $10,000.

"I like the fact that you can sell the notes back to Barclays," Medeiros said.

Another potential early redemption scenario would be the automatic call, which is triggered if the closing indicative note value falls to or below 25% of the principal amount.

The use of this index in a note is not a first for Barclays.

In December, Barclays priced $30 million of notes due Dec. 23, 2014 linked to this index. In January, it priced $3.95 million of such notes due Jan. 12, 2015.

The Cusip for the upcoming notes is 06738KQ38.

Barclays Capital Inc. is the agent. Choice Financial Partners, Inc., an affiliate of Stifel, Nicolaus & Co., Inc., is the index selection agent.

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