Barclays unveils commodity-linked ETNs; Morgan Stanley's warrant units could aid taxes, advisors say

By Kenneth Lim

Boston, June 25 - Barclays Bank plc launched a number of exchange-traded notes, including one linked to the price of carbon credits.

Meanwhile, investment advisors at wealth management firm Blue Bell Private Wealth Management said Morgan Stanley's new note-and-warrant structure, offered in a product linked to the Nikkei 225 index, could be an attempt to get a better tax treatment for the investment.

Barclays launches ETNs

Barclays this week priced at least $1 billion worth of 11 new ETNs based on its iPath platform.

All but one of those ETNs were linked to sub-indexes of the Dow Jones - AIG Commodity Index Total Return. Those notes mature on June 24, 2038, and investors will gain or lose 1% for every 1% increase or decrease in the underlying, less a fee. The notes were initially sold at par of $50.

The note linked to the aluminum component will trade under the symbol "JJU" on NYSE Arca. The symbol is "NIB" for the note linked to cocoa, "JO" for the product linked to coffee, "LD" for the note linked to lead, "BAL" for the ETN linked to cotton, "JJP" for the product linked to precious metals, "JJS" for the one linked to softs, "SGG" for the one linked to sugar, "JJT" for the one linked to tin and "PGM" for the product linked to platinum.

Barclays also launched $250 million worth of ETNs due June 24, 2038 linked to the Barclays Capital Global Carbon Index Total Return. The note will trade under the symbol "GRN."

Investors will gain or lose 1% for every 1% increase or decrease in the underlying index, again less a fee. The notes were initially sold at par of $50.

The Carbon index references the price of carbon emissions credits from the European Union Emission Trading Scheme and the Kyoto Protocol's Clean Development Mechanism.

"The global carbon arena has the potential to become one of the world's largest commodities markets and we are pleased to offer investors exposure to this growing market," Barlcays head of solution sales for the Americas, Philippe El-Asmar, said in a press release. "The launch of this product underscores the importance of our environmental markets business and providing clients with access to harder-to-reach markets."

Morgan Stanley note could aid tax

Morgan Stanley this week announced a series of zero-coupon capital-protected units, each consisting of a note and a cash-settled warrant, due Nov. 29, 2011 linked to the Nikkei 225 index.

"I'm not an accountant, but our belief is that those warrants could qualify for long-term or at least capital gains that could be offset with other capital losses," Blue Bell's Scott Miller Jr. told Prospect News. "By doing this, it lessens some of the tax disadvantages of structured notes."

At maturity, investors will receive par of $10 plus the cash settlement amount in respect of the warrant if the warrant has not been exercised yet. The cash settlement amount will be 1% of the principal for every 1% increase in the index, subject to a maximum return on the units of $14 to $15 per unit, or 40% to 50%. Investors will receive at least par.

The warrants may be separated from the note and traded or exercised before maturity, provided the holder has the required brokerage account. If exercised before maturity, the warrants will be settled based on the cash settlement amount.

Warrant key to bifurcation

The fact that the warrants can be detached and traded independently means that the product can be split and treated differently, J. Scott Miller, also of Blue Bell, added.

"But the key is that you must bifurcate, which means you must split this into the warrant component and the zero-coupon note," Scott Miller said. "And you can't do it for the first three months. You must do it if you want to possibly apply capital gains treatment. Here's what happens. You're still going to have to pay the ordinary income tax on the zero-coupon bond, but your warrant, which will trade independently, will have capital gains treatment."

That bifurcation allows the possibility that gains on the warrants could be used to offset capital losses, Miller said.

But he said it was not clear if such a treatment will be accepted.

"One thing to caution on, and I think we read it in the prospectus, is you can't do it for three months," he said. "Let's assume it goes up from $10 to $11. There's a possibility that the IRS could say, now that you've bifurcated it, they might say what you really did is sold the unit, and now you have two new investments. I don't know of any product like this."

Structure's appeal limited

Miller doubts that the structure will be attractive if used on a product linked to the more widely followed S&P 500, he said.

"Here's the problem: I believe if we priced this on the S&P, the cap would be significantly lower, and the cap could be as low as 24%," he said. "Well, that would be a maximum return of 8% per year. That would be not so bad if there were absolutely no risk. In this case the problem isn't the tax situation, the concern is how would they price it."

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.