Barclays' $67.48 million notes linked to renminbi offer protected access to popular trade

By Emma Trincal

New York, May 2 - Barclays Bank plc's $67.48 million of 0% notes due May 1, 2014 linked to the performance of the Chinese renminbi relative to the dollar appealed to investors for the full principal protection provided on a short-term product and for an underlying investment theme that is rising in popularity, sources said.

"This is a simple bullish note on the Chinese renminbi and it's attractive. I can see why people would buy it," said Clemens Kownatzki, an independent currency and options trader in Los Angeles.

If the currency return is greater than zero, the payout at maturity will be par plus 146% of the return, according to a 424B2 filing with the Securities and Exchange Commission.

If the currency return is less than or equal to zero, the payout will be par. The currency return will be positive if the renminbi appreciates relative to the dollar.

Barclays Capital Inc. was the agent. JPMorgan Chase Bank, NA and J.P. Morgan Securities LLC were dealers.

"I personally wouldn't seek exposure to the Chinese renminbi through a note, simply because I don't like to be locked in. But this is a very good product, especially with the principal protection and the short-dated maturity," Kownatzki said.

He added that the trade resonates with his own view as he believes that the Chinese currency is likely to appreciate further.

"But I see the trend happening gradually. The reason I wouldn't use that note is just because as an investor, I want to be able to get in and out of that trade if I don't see the trend materialize," he said.

Attractive terms

Still, the notes offer several cost and access benefits to retail and high-net-worth investors, according to Kownatzki.

"It's hard to get access to the renminbi. This note is a very nice way to get that exposure. The 1% fee is not huge. And the alternatives are limited," he said.

"You could buy futures options on the renminbi, but you wouldn't have the full downside protection and you would have negative roll yield. You would have to hedge that, and it would be expensive," he added.

Research driven

Sources said that betting on the renminbi against the dollar is a popular theme that some firms have been promoting more than others.

Talking about the large size of the offering, which priced last week, a market participant said, "That's kind of mandate-driven by JPMorgan."

When a firm has a particular view, the distribution network tends to show a deal to the bank's high-net-worth clients who look for "actionable" ideas, he explained.

"It's driven from the top," he said. "Most of the wirehouses do that: they sell structured products wrapped around their research. Some firms have more of a following, and JPMorgan is one of them."

Appreciation

According to Kownatzki, the renminbi bulls are part of a growing crowd.

"There is a huge demand for this trade because the majority of the players believe that the Chinese will have at some point to let their currency appreciate. The question is when," he said.

He noted that he has not found any "cost-effective" way to play the rise of the Chinese currency against the dollar. Part of the problem is the contango seen with futures and exchange-traded funds, he said. The other is the uncertainty about the timing of the Chinese government despite strong political pressure from the United States.

"China has to do a massive intervention to keep its currency from appreciating, and because of that, they're importing massive inflation," he said.

"Politically, it's not sustainable long term. Inflation is a big problem when you have billions of people struggling to make ends meet.

"They want to make the change gradual.

"Letting the Chinese renminbi go up is a hot-button issue, though, because the low currency helps them with their exports even if it generates inflation.

"The alternative in order to fight inflation is to let the currency appreciate gradually, but they have to be very careful because they don't want to cut off their exports."

The Chinese currency has appreciated over the past couple of years, but many believe that it remains undervalued.

The desire to fight back inflation along with China's gradual move away from dollar-denominated Treasuries toward hard assets and other currencies are long-term factors playing in favor of the bulls, said Kownatzki.

But the catalyst will probably be when China decides to liberalize its monetary regime and allows conversion, he said.

"Then it will happen because the speculators, who are not interested in slow, progressive trends, will all of a sudden step in," he said.

FX pricing

Kownatzki said that the relatively short tenor of the notes combined with the full principal protection make the product "almost too good to be true."

A structurer explained that it is not rare to see attractive terms on currency deals when compared to equity-linked notes.

"It's a lower-volatility asset class. It makes the market exposure cheaper. When the option price is lower, you can buy more options," he said.

"FX leans well to principal protection. You would never get that protection on a two-year note in equity," he said.

For some, it makes it difficult to understand why investors are not buying more full principal protection on shorter tenors using currencies as reference assets.

"Retail investors are not too confident investing in foreign exchange," the structurer said.

"In most portfolio allocation mandates for advisers and private banks, FX tends to be the lower portion of their allocation. That's why demand for this asset class remains limited."

Kownatzki said that high-net-worth investors tend to have exposure to international assets through equity using either mutual funds or ETFs.

"Sometimes they don't even bother. One very simplistic, conservative kind of attitude is to stay in the S&P [500] since 50% of the profits of those companies are built overseas," he said.

The Cusip number is 06738K4E8.

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