Barclays to issue up to $1.4 billion ETN+ FI Enhanced Global High Yield at client's request

By Emma Trincal

New York, May 22 - Barclays Bank plc created two new exchange-traded notes in response to a client's request, a sellsider familiar with the deals told Prospect News.

"They are both reverse inquiries from a client, the same client for both deals," this sellsider said.

Barclays did not issue press releases or post information on its website on purpose, he noted.

"The securities are listed on the exchange so people can buy it. But Barclays is not going to market those ETNs."

Reverse inquires

Barclays will issue up to $1.4 billion of 0% Barclays ETN+ FI Enhanced Global High Yield ETNs due June 4, 2018 linked to the MSCI World High Dividend Yield USD Gross Total Return index, according to a 424B2 filing with the Securities and Exchange Commission.

The issuer sold a portion of the ETNs on May 21 at par of $100. The remainder will be sold from time to time at varying prices.

Additionally, Barclays will issue up to $350 million of 0% Barclays ETN+ FI Enhanced Europe 50 ETNs due June 5, 2018 linked to the Stoxx Europe 50 UDS (Gross Return) index, according to a 424B2 filing with the SEC.

The underlying index is composed of 50 European blue-chip companies selected from within the Stoxx Europe 600 index, which contains the 600 largest stocks traded on the major exchanges of 18 European countries

The issuer sold a portion of the ETNs on May 22 at par of $100. The remainder will be sold from time to time at varying prices.

Barclays uses two brands for its ETNs: the iPath and the ETN+ series. Usually, the ETN+ products are designed for bespoke strategies, as it was the case with both deals, the sellsider said.

The underlying indexes of those issues are not widely used, market sources noted, in particular the MSCI World High Dividend Yield USD Gross Total Return index. This index tracks the performance of large and mid-cap stocks (excluding REITs) across 24 developed-markets countries tracked by the MSCI World index with higher-than-average dividend yields that are potentially both sustainable and persistent.

"It's the first time this index has been used in any ETN to my knowledge. We couldn't find it anywhere else," the sellsider said.

Sources said the five-year maturity is rather short for an ETN.

"It was a bespoke deal. I'm not really sure why a five-year term and what the real motivation was," the sellsider said.

Yield around the world

Investors often use ETNs to access hard-to-reach exposures, sources said, especially when an equivalent exchange-traded fund does not exist.

"To my knowledge, there is no ETF on this index," the sellsider said.

ETFs giving exposure to some of the MSCI global equity indexes include products that track the MSCI All Country World index, the MSCI All Country World ex-U.S. index and the MSCI All Country World Minimum Volatility index for instance, but not the MSCI World High Dividend Yield index, according to a table published by ETF Database.

"The client was probably interested in getting exposure to this index. Even if there was an ETF, some people prefer the ETN structure versus the ETF format," the sellsider said.

"Looks like a one-off probably, so it's hard to tell. They probably did it because it's hard to invest in this index in cash directly. Doing it synthetically makes more sense," an industry source said.

A market participant pointed to the underlying investment theme.

"This is a global equity play going for yield. It's a product that was designed to capture the yield. That's the trend," he said.

"Same idea with the recent four $50 million deals JPMorgan did last week on the iBoxx [$ Liquid High Yield index] and leveraged loan ETF. Everybody is going for this kind of stuff.

"I haven't seen this MSCI index before, but there are so many high-yield indexes out there, they probably had to look for something that wasn't used before."

The industry source said he was not familiar with the index either.

"It's an ETN created for income," he noted.

"It gives you leveraged exposure to a high-yielding index.

"You get the double benefit of leverage and yield, and that's not so common. I know that some issuers like UBS have offered income-oriented leveraged ETNs, but it's not the rule. You don't often get twice or three times a high-yielding index."

Some of the dividend-oriented UBS ETNs available with leverage include the ETracs Monthly Pay 2x Leveraged Dow Jones Select Dividend Index ETNs and the ETracs Monthly Pay 2x Leveraged Mortgage REIT ETNs.

Triggers

The unusual way Barclays structures leverage on its ETNs may have been also appealing to the investor, sources said.

The exposure of the ETNs to the index will not reset during the term of the notes at a set frequency but only upon the occurrence of a rebalancing event, the prospectus explained.

A rebalancing event occurs if the index's intraday level falls to or below the rebalancing trigger, which equals 1.6 times the closing level of the index, according to the prospectus.

"This type of rebalancing is pretty typical of Barclays. Most of their ETNs offer the leverage plus an early redemption mechanism. If the index hits a trigger, they rebalance," the industry source said.

"Think about it that way: With a two-times leveraged note, if your index falls by 51%, the product is bankrupt. You can't lose more than 100%. So the leverage has to be rebalanced.

"For the most part, issuers have a daily reset mechanism in place in their leveraged ETNs. Not here.

"Usually, you get two or three times exposure to an index on a daily basis. Every day it resets.

"Barclays differentiates itself by offering a leverage that doesn't automatically reset daily but instead resets only if a trigger event happens.

"They've done that to address some of the problems with the daily reset. Those are well-known. With the compounding, you think that you're going to get two or three times the index. But you may not."

Both ETNs are also subject to automatic redemption.

The notes will be automatically redeemed if the index's intraday level falls to or below the automatic redemption trigger, which will be 1.4 times the closing level of the index on that day, according to the prospectus.

"The rebalancing trigger is precisely designed to make an eventual knock-out event less likely," the sellsider said.

The issuer has applied to list the MSCI World index-based ETNs on the NYSE Arca under the symbol "FIGY."

The other product, which is based on the Stoxx Europe 600 index, will be listed under the symbol "FEEU."

Both notes are putable at any time, subject to a minimum of 10,000 notes, and callable at any time.

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