Barclays launches Callable One Observation notes; product streamlines autocallable structure, adviser says

By Kenneth Lim

Boston, March 18 - Barclays Bank plc's Callable One Observation Reverse Convertible platform could be attractive to investors seeking to take advantage of short-term trading ideas, an investment adviser said.

Barclays this week launched four new series of products using the structure.

It plans to price 16% annualized Callable One Observation Reverse Convertible Notes due Sept. 30, 2009 linked to the common stock of General Electric Co.

Interest is payable monthly. If GE stock closes at or above the initial share price on June 25, the notes will be automatically called at par. If the notes are not called, the payout at maturity will be par unless the stock closes below the protection price of 60% of the initial price, in which case investors will receive a number of GE shares equal to $1,000 divided by the initial price or, at Barclays' option, par minus the share price decline.

Based on the same structure, Barclays is offering 10.2% annualized notes linked to the stock of the Goldman Sachs Group, Inc. with a protection price at 60% of the initial price; 10% annualized notes linked to the stock of Monsonto Co. with a 70% protection price; and 20% annualized notes linked to the stock of JPMorgan Chase & Co. with a 60% protection price.

Short term solutions

The Callable One Observation notes are similar to more typical autocallable structures, but with a shorter timeline, the investment adviser said.

"What I think they've done is to streamline the autocallable," the adviser said. "Usually, the structure you see with an autocallable is maybe a two- or three-year product with a few call dates, and the notes will get call on each of those if the underlying is above a certain level. If it's not called at maturity, you get back par if the underlying stays above a certain level.

"So it's very similar, except in this case you only have one call date and I don't know if they offer call thresholds lower than 100%. Some autocallables, especially now, we've seen them with thresholds lower than 100%.

"I say it's streamlined because most of the time with autocallables beyond the first or second call dates the rest don't really matter as much anymore because if you're not called at the start, you generally fall further and further behind the subsequent thresholds," the adviser said.

"They're cutting out the excess, in a sense. The other thing is that with the autocallable it's usually riskier when you get to maturity because, even if there's a barrier, it's harder to predict where the underlying is going to be after three years, for example. In this case you're only asked to make a prediction six months out, which is much easier to do."

Single-stock possibilities

The structure could have helped the issuer to link to individual stocks rather than indexes, the adviser added.

"Especially now with volatility so high everywhere you look, it's really hard to have an autocallable linked to a single stock that investors are willing to buy because it's so risky," the adviser said. "Investors could be more comfortable with shorter products."

The product could be interesting for investors who have a short-term trading view of certain underlying stocks, the adviser said.

"If you think GE, for example, is going to be up in the next six months, you might take this just to take a shot at that 8% return in six months, 16% annualized" the adviser said. "You have downside protection of 40%, which you pay for by capping your return at 8%. But if you'll be happy with that return - why not? It's a much better return than you can get from many other alternatives. So if that return works for you and you're certain GE's going to be up in six months time, this could be a good investment."

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