Barclays' principal-protected notes linked to gold with 23.55% cap seen as 'fairly' priced

By Emma Trincal

New York, March 20 - Barclays Bank plc's 0% notes due March 27, 2014 linked to the performance of gold offer good value to investors seeking to bet on gold with a limited amount of capital at risk, sources said.

The notes offer 90% principal protection on a two-year maturity, according to an FWP filing with the Securities and Exchange Commission.

If the final price of gold is at least 90% of the initial price, the payout at maturity will be par plus the gold return, subject to a maximum return of at least 23.55%. The exact cap will be set at pricing.

Investors will receive $900 per $1,000 principal amount of notes if the price of gold declines by 10% or more.

"It's like paying a deductible for insurance," said Tony Romero, cofounder and managing partner at Suncoast Capital Group.

"You could just own the GLD, but it's true that you'd be better off with these notes if gold crashes below 10%."

"GLD" is the NYSE Arca symbol for the SPDR Gold Trust, a widely used exchange-traded fund that tracks the price of a tenth of an ounce of gold.

"If you want to speculate on gold while reducing your risk, that's one way to do it," Romero said.

"Gold products are popular," a sellsider said.

"There are always people looking for gold exposure with what's happening in Europe, and others like the direct exposure to the price of gold, which you can get pretty easily with a structured note," he said.

Collar

Lee Kramer, president of Capital Management Analytics, compared the notes to an equivalent options strategy. His conclusion is that the product is competitively priced.

"You could replicate what the note does in using a collar," he said.

With a collar, an investor buys a put option for the downside protection while selling a call. The short sale of the call caps the potential return but is used to reduce and in some case offset the cost of buying the put.

Kramer took the closing price of the SPDR Gold Trust ETF on Tuesday at $160 per share. He selected for his comparison an option expiring in January 2014, just two months shorter than the notes.

"It's reasonably similar," he said. To replicate the protection, I would buy a put January 2014, 10% out of the money, with a $144 strike."

If the price of gold drops below the strike price of $144, the put buyer is protected from any further losses because he has the right to sell the underlying at the strike price.

Kramer said that the cost of this put is $10.

In order to pay all or part of the premium needed to purchase the put, Kramer said that an investor could sell a call option 23.5% out of the money at a $198 strike. The $198 price is approximately the equivalent of the 23.55% cap on the notes.

The short sale of the call brings a premium income of $7.80, according to Kramer. The net cost to the options investor - or the difference between the premium received on the call and the premium disbursed on the put - is then $2.20.

Based on the initial cost of owning the ETF and across 22 months, the annualized cost of this collar strategy is 75 basis points, he explained.

Credit risk premium

Kramer compared the collar strategy, which costs 75 basis points more than the notes.

"There is the two months' difference, which may contribute to a few basis points here and there. But that's not the main reason," he said.

"The collar strategy will cost you more because it's practically risk free besides the risk of losing 10% of your capital.

"With the Barclays note, you're subject to the same 10% market risk. But on top of that, you're exposed to credit risk. You're buying the unsecured debt of Barclays. This is why the options strategy will be slightly more expensive.

"For investors willing to take on credit risk, the notes seem like a neat alternative to a collar, especially for a small account. You can just buy for $1,000.

"As far as I can tell, the pricing is very fair."

Comparing the notes to the options trade, Romero said, "You're accomplishing the same thing without the hassles. It's not without merit."

The notes (Cusip: 06738KZ38) will price Friday and settle March 28.

Barclays Capital Inc. is the agent with JPMorgan Chase Bank, NA and J.P. Morgan Securities LLC as dealers.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.