Principal protection becoming more popular; Barclays to price notes linked to currency basket

By LLuvia Mares and Sheri Kasprzak

New York, Nov. 20 - Going the principal-protection route is becoming a more popular path to travel in the structured products market, according to a market analyst.

"From my end, because we are not doing tons of FX deals, we have been doing more and more principal protected, and that's what is so interesting, at least from my stand point," said the market analyst.

"We continue to see principal protection spreading out in all asset classes and in all different shapes and sizes, which I think is great because we have been too reliant on the reverse convertibles for too long."

One bank working on principal-protected notes - or something close - is Barclays Bank plc, which plans to price zero-coupon 99% principal-protected digital plus notes linked to a basket of currencies.

J.P. Morgan Securities Inc. is the agent on the one-year notes.

Elsewhere, AB Svensk Exportkredit priced an offering of $23.01 million in notes linked to two Asian currencies and $69.01 million in notes linked to three Asian currencies. The notes are the latest in notes linked to Asian currencies.

Market sources have pointed out recently that Asian currencies are more appealing to U.S. investors given market volatility in the United States and the weak dollar.

Terms of the currency notes

"We are doing numerous structures from simple baskets which include world indices and world baskets, mostly 100% to 90% principal-protected, and I think that's noteworthy and I hope it continues," said an analyst.

The basket on the Barclays deal includes equal weights of the Singapore dollar, Philippine peso, Indonesian rupiah and Malaysian ringgit.

If the basket currencies appreciate relative to the dollar by 2% or more, the payout at maturity for each $1,000 principal amount of notes will be $990 plus 10% plus double the amount, if any, by which the basket appreciation is greater than 2%.

If the basket currencies do not appreciate relative to the dollar by 2% or more, the payout will be 99% of par.

The notes will price Nov. 20 and settle on Nov. 26.

Svensk's Asian currency-linked notes

Two separate but similar deals from Svensk Exportkredit demonstrate the bank's willingness to open channels for new structures, according to market specialist.

"I've noticed the issuers are beginning to bring more variety, as far as product and levels of principal-protection, which I'm hoping indicates that at least the clients are willing to look at it," said the specialist.

"Sales haven't really fallen behind yet, it takes time and in particular for retail. But hopefully this is a global indication that banks are willing to look at new structures versus just staying with the old U.S. equity-base focus."

Both bull note deals are linked to Asian currencies and have a 19-month term. Both notes are being sold through Goldman, Sachs & Co.

One deal, sized at $23.01 million, is linked to a basket of two Asian currencies consisting of equal weights of the Indonesian rupiah and the Philippine peso, each against the dollar.

The payout at maturity will be 104.5% of par plus 200% of any gain on the basket. Investors will receive at least 104.5% of par.

The second deal priced at $69.01 million and is linked to three Asian currencies baskets consisting of equal weights of the Chinese renminbi, the Malaysian ringgit and the Singaporean dollar, each against the U.S. dollar.

The payout at maturity will be 104.5% of par plus 200% of any gain on the basket. Investors will receive at least 104.5% of par.

RBC plans 28% reverse convertibles on Merrill

In other news, Royal Bank of Canada is negotiating the terms of 28% reverse convertible notes linked to the stock of Merrill Lynch & Co.

"It's a volatile stock, lots of investor uncertainty surrounding MER so the coupon will be bigger," said one market insider. "Twenty-eight percent doesn't even seem like that big of a coupon."

The three-month notes pay par at maturity unless the stock falls below the 80% barrier price during the life of the notes and ends below the initial share price.

Should that happen, the notes pay a number of shares equal to $1,000 divided by the initial share price.

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