Barclays' $100 million offering of Citi-linked notes stirs up market speculation

By Emma Trincal

New York, Sept. 24 - Barclays Bank plc' pricing of $100 million of 17% Yeelds linked to Citigroup Inc. stock led some market sources to wonder about the factors that drove the unusually large size of the transaction, the type of buyers behind it and the rationale for the issuer in structuring the offering. But what actually is going on is anyone's guess.

Barclays priced on Tuesday the 17% annualized yield enhanced equity linked debt securities due March 29, 2010 tied to the common stock of Citigroup, according to a 424B2 filing with the Securities and Exchange Commission.

The payout at maturity will be an amount equal to the volume-weighted average price of Citigroup stock on March 22, 2010. It will be capped at 130% of par and payable in stock or cash at each holder's option. Each note has a face value of $4.65, which was the closing price of Citigroup stock on Tuesday. The coupon is payable quarterly.

A spokesperson at Barclays declined to comment on the deal.

Institutional size

"I would tend to think that it's probably a product sold to an institutional buyer," said Carl Kunhardt, a financial adviser who is director of investment management and research at Quest Capital Management in Dallas.

He pointed to the absence of underwriting fees and the very large size of the new issue. "It may have been a note created just for an institutional investor," he said.

No buffer

The product resembles a standard reverse convertible in that it offers a high and fixed coupon and that the security is tied to a stock. But unlike most revert convertibles, these notes do not offer any downside protection. Rather than paying back the principal amount unless the underlying stock hits a trigger at some percentage of the initial value, investors lose if there is any decline in Citi stock from its starting point.

"If this product was available in retail, I wouldn't be interested in showing it to my clients," said Kunhardt.

"We use structured products as a hedge. I always look for downside protection and there is none here. That's why it would fall off my filters because I want some sort of protection or buffer," he said.

"It's a product for bullish investors on Citi. And it's kind of contrarian. If you read the Wall Street Journal today [Thursday], they talk about Citi continuing to contract," said Kunhardt.

Citigroup shares were down 2.50% in mid-day session on Thursday following an article in the Journal reporting that Citigroup was considering a plan to pare back its retail banking business. The stock price has fallen by 34% to $4.40 since the beginning of the year.

Covered call

But a market source said that this large size deal looks very much like a hedge on the part of Barclays rather than a bullish bet on the stock. "If you were really bullish, you'd buy the stock directly," this source said.

"This looks like Barclays sold a call on Citi stock to cover its own position," he said.

"I have seen these at Citigroup and UBS before. That's how a lot of the banks hedge their positions. They package it up and sell it under the form of structured notes. I can't be sure that this is what it's about here; but it seems to be pretty close," he said.

This source explained how the sale may have worked though he emphasized that it was just his "guess."

"Let's say that Barclays is long $100 million worth of Citigroup shares. They want to protect themselves against the downside if the stock goes down. So they will write calls - in this case - covered calls since they own the shares," thie source said.

He added that the bank sets up the hedge through the creation of the notes: "They sell a call off the [Citigroup] stock. They package it up as a structured product and sell it to investors.

"The way the bank protects itself on the downside risk of owning the stock is by collecting the premium that it earns when selling the calls. If the stock falls, they still earn some income," he said.

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