Barclays' $27.62 million autocallable notes on Apple appeal to bulls with short-term outlook

By Emma Trincal

New York, Jan. 3 - Barclays Bank plc's $27.62 million of 0% autocallable notes due Jan. 6, 2012 linked to Apple, Inc. shares are designed for investors who believe that the stock will continue to appreciate or remain stable over the next year, sources said.

Bulls have been right so far. The stock rose 56.5% last year.

This deal comes on the heels of several other Apple-based autocallable offerings that have priced in large sizes over the past four months amid a buoyant, bullish sentiment about the popular name.

The deal offers a maximum return of 16.01% for a 20% downside protection.

If Apple stock closes at or above the initial share price on any of 12 monthly observation dates, the notes will be called automatically and investors will receive par of $10 plus an annualized call premium of 16.01%, according to a 424B2 filing with the Securities and Exchange Commission.

The payout at maturity will be par if the stock finishes at or above 80% of the initial share price.

If the stock finishes below the trigger level, investors will be fully exposed to the loss.

Apple outlook

"Whether this investment is worthwhile depends on your outlook on the stock," said Michael Kalscheur, financial adviser at Castle Wealth Advisors. "You're betting that Apple is not going to appreciate very much or not at all in the short term.

"If you think that the stock is going to go up and that you're going to be called up in a short period of time, then from that standpoint, it makes a lot of sense."

The stock has been one of the best stories of last year as well as in the first trading day of 2011, and many investors have remained bullish, sources said.

"For some people, $330 a share is rich and there's not much room to go higher. For these, it's not likely that the notes would get called," said James Kelleher, director of research and senior analyst at Argus Research Co., who has a buy rating on the stock.

"But personally, I think the shares have a lot further to go. It's a fairly good investment considering that Apple this year will take massive iPhone shares and will dominate the tablet market."

This view prevailed Monday when Apple shares hit a record high at $329.57, up more than 2% amid investors' expectations of continued market share gains and new business developments for 2011.

"There is a sense among investors that the stock will continue to appreciate, not because of new products but because of growing existing market shares," he said.

Apple is said to be soon releasing the iPhone on Verizon, according to analyst and news reports.

High call premium

Kalscheur said that the call premium and the creditworthiness of the issuer were attractive features of the deal.

"If it gets called, it's likely to get called early, but if I can pocket a return after one or three months, it's still going to be the same 16% annualized rate of return. That's pretty good. If your goal is to get into this investment and get called, then it's very interesting," he said.

"Barclays Bank is rated AA- by S&P, which is phenomenal. It's higher than Deutsche Bank for instance. I like that."

Some risks

However, Kalscheur said that he was "not sold on the deal" for a number of other reasons.

One factor was the capped return.

"I can't get really excited about it. If I'm excited about Apple stock, I buy the stock and I don't limit my gains to 16%," he said.

In addition, the notes do not give investors sufficient downside protection, according to Kalscheur.

"I personally would like to see more downside protection than 20%," he said.

"After you pass the 20% stock price decline, it's dollar for dollar. If something really goes bad, you've got all the downside risk."

Kalscheur voiced other objections that pertained to the structure itself or to structured notes in general.

"There may not be enough liquidity on the secondary market. You depend on Barclays' discretion to buy back your notes," he said.

"And while everybody knows Apple, it's still a single stock. I'm just not sold on the autocallable concept based on a single stock."

Well-liked story

Last year saw several successful autocallable offerings based on the price of Apple shares. The Barclays deal, which settled Friday on the last day of the year, was the sixth offering of this kind since September with a size in excess of $20 million, according to data compiled by Prospect News. The issuers included Morgan Stanley, Deutsche Bank AG, Bank of America Corp., UBS AG and JPMorgan Chase & Co.

UBS has been the agent for several banks including Deutsche Bank and JPMorgan.

UBS Financial Services Inc. and Barclays Capital Inc. were the underwriters for the Barclays deal.

Fees are 1.25%.

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