Barclays ETF-linked note brings structural simplicity, analyst says; water-based notes touch neglected asset

By Sheri Kasprzak and LLuvia Mares

New York, Sept. 17 - Barclays Bank plc's recent offering of ETF Plus variable-coupon notes based on the iShares MSCI Emerging Markets Index offers a simpler structure for the firm originating the deal, an analyst said Monday.

Tim Mortimer, managing director of Future Value Consultants, a London-based company that analyzes derivative products, said Monday that the underlying exchange-traded fund itself should track the index.

"It's their ETF," Mortimer said. "So it makes hedging a lot easier, I would think.

"The guys on the cash end are managing the ETF. There's a little bit of a tracking error on the index and the ETF itself. The [structured products] guys don't have to worry about tracking it."

Mortimer noted that if the note was linked to an actual index, it would have to replicate it exactly. Linked to its own ETF, the structured products desk can save a major step in putting together the deal.

Barclays priced $5 million of the ETF Plus variable-coupon notes linked to the iShares MSCI Emerging Markets Index.

Terms of ETF notes

The one-year ETF variable-coupon notes pay par times 100% plus the share performance on the final observation date. The share performance will equal the final price minus the initial price divided by the initial price.

The notes are not principal protected and investors may lose all of their investment.

The investors will be paid a variable coupon equal to the product of the principal amount times 2% plus the apportioned dividends.

The apportioned dividends will be the actual stated dividends paid per share of the ETF during the period from the initial observation date through the final observation date times the number of reference shares in the notes.

The initial price of the ETF is $133.95.

Eksportfinans' water notes

Mortimer said Eksportfinans ASA's plans to price Accelerated Return Equity Securities linked to the Credit Suisse Water index highlight water's importance as a commodity.

"Water sometimes get described as the most precious commodity we have," Mortimer said Monday. "It's often overlooked by commodities like oil. So why water? Why not?"

The zero-coupon, five-year notes are set to price Sept. 21. The index includes the stocks of 30 companies active in the water sector.

If the final index level is greater than or equal to the initial level, the notes pay par plus 112% of any gain on the index. If the final index level is less than the initial level, the payout at maturity is par minus the index decline.

Lehman bring financial deal

Meanwhile, in a thin day for structure products news, Lehman Brothers Holdings Inc. announced Monday a significantly sized issue that continues the recent popularity of financial stocks as underlyers.

But rather than select individual stocks or a relatively small selection of names for a basket, the transaction is tied to an index of the sector as a whole.

Lehman priced $13,997,350 of autocallable optimization securities with contingent protection due Sept. 19, 2008 linked to the S&P 500 Financials index, according to a 424B2 filing with the Securities and Exchange Commission.

The notes will be called at increasing premiums if the closing level of the index is above its initial level on any quarterly observation date.

Investors will receive 105.6% of par if the notes are called on Dec. 14, 111.2% of par if called on March 14, 116.8% of par if called on June 16, 2008 and 122.4% of par if called on Sept. 16, 2008.

If, during the life of the notes, the index has ever closed below the trigger level - 80% of its initial level - the payout at maturity will be par plus the index return. Otherwise, the payout will be par.

UBS Financial Services Inc. and Lehman Brothers Inc. are the agents.

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