Barclays' $43.73 million capped leveraged notes tied to PHLX Housing target homebuilders bulls

By Emma Trincal

New York, April 2 - Barclays Bank plc's $43.73 million of 0% Capped Leveraged Index Return Notes due March 27, 2015 linked to the PHLX Housing Sector index appealed to investors eager to participate in the strong homebuilding stock rally, sources said.

The notes offer more value to the moderate bull, a financial adviser said, who sees a relative value play in the sector. On the other hand, the truly bullish investor would probably object to the cap and prefer a direct investment in the index itself or individual homebuilder stocks, another source said.

If the index return is positive, the notes at maturity will offer a payout of par plus 200% of the index return, subject to a maximum payout of par plus 23.62%, according to a 424B2 filing with the Securities and Exchange Commission.

Investors will receive par if the index falls by up to 5% and will lose 1% for every 1% decline in the index beyond 5%.

The underlying index is designed to measure the performance of some companies directly associated with the U.S. housing construction market.

For Donald McCoy, financial adviser at Planners Financial Services, the notes offered investors a chance to play a sector that may offer more value than others despite the surge in homebuilder stock prices since the end of 2011.

"The sector was off so much, it had to go up. It was a dead cat bounce. People saw an opportunity," he said.

"It's really a sector bet. I think it's also a relative value play: If you buy this, you think that homebuilder stocks are not as overvalued as the rest of the market."

The PHLX Housing Sector index has increased by 6% this year and is up by nearly 50% over the past 12 months.

"Those stocks had a huge run, but they were coming from such a low. Just because something has had a strong run doesn't mean it still doesn't have a long way to go. Investors in the notes believe that this index will outperform the market as well as other sectors, which they see as fully valued, like the tech sector for instance," he said.

"If you think that equity and bond markets are pretty played out, this might be an opportunity to get some returns even if the index is trending sideways since you get the leverage on the upside."

Moderate bulls

The structure of the notes, with the 12% annual cap and the leverage, called for moderately bullish investors only, McCoy said.

"Investors in the notes are cautiously optimistic on the index, and they rely on the leverage factor to outperform the overall market," he said.

"The index only has to go up 6% a year to get the maximum.

"If you're mildly enthusiastic about the housing market sector, you're going to feel pretty good about your downside. You get the 5% bonus protection. If the index is down 5%, you get your principal back.

"It's a simpler way to play this market.

"I don't have an opinion on the homebuilders. But if I was of the opinion that this sector will continue to go up, this would sound like a good product to me."

Cap

For Jim Delaney, portfolio manager at Market Strategies Management, the robust rally seen in the PHLX Housing Sector index is not about to fade but should instead continue to pick up momentum. As a strong bull in the sector, he said that the cap of the notes was too high a price to pay for a buffer that may end up being unnecessary or insufficient.

Looking at the five-year chart, Delaney identified two bottoms in the PHLX Housing Sector index: one in March 2009 at 55.17 and the second in October 2011 at 75.98. Two weeks ago, the index hit its "high" at 197.17.

"We're looking at an index that has gone up by 257% in four years and up 160% in the last 18 months," he said.

"Housing is coming back. The index is doing what it's doing because of that.

"The U.S. economy is in recovery; home sales are high; companies are starting to build again.

"If it's just coming back, you've got to expect a reasonable growth for the next couple of years.

"By limiting your upside to 12% a year, you're probably shortchanging yourself because it doesn't look like you need that cap and the buffer on the downside. That 5% isn't going to save you any money anyway.

"You're giving up a lot of upside, and for what you're giving up, it's pretty expensive."

Delaney looked at the index chart and identified strong downturns that occurred within short periods of time.

From the end of April to early July in 2010, for instance, the index fell 33%, he said, pointing to the less-than-three-months period.

Between mid-February and the beginning of October of 2011, the index dropped 37%.

"This thing moves around a lot, so 5% is not going to cut it," he said.

"When you're dealing with 20%, 30% or 40% downside moves, this 5% buffer is expensive and it's not going to help you much."

Growth mode

Delaney's strongly bullish view on the housing and construction sectors was rooted in his economic outlook.

"This index is not a stock. This is a window into a macroeconomic view," he said.

"Housing is coming back. It was so depressed for so long, for five years. Once you start to deploy resources in that area, you can see that the rising price trend is not about to stop now. Lumber companies are planting trees again. These builders are acquiring new lots to build on. We're in growth mode. That's why I wouldn't want the cap.

"This index could easily move by more than 12% a year. In fact, I can see it up 15% to 20% a year for two years in a row."

BofA Merrill Lynch was the underwriter.

The notes (Cusip: 06742C780) priced on March 28.

The fee was 2%.

Separately, Bank of America Corp. plans to price Capped Leveraged Index Return Notes due April 2015 also linked to the PHLX Housing Sector index at the end of the month. The upside leverage factor will also be two. The cap will be comprised in the same range, between 20% and 24%, and the 5% buffer will be the same, according to an FWP filing with the SEC.

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