Barclays' notes linked to crude oil futures offer direct oil exposure in autocallable format

By Emma Trincal

New York, Dec. 7 - Barclays Bank plc's upcoming 0% quarterly autocallable notes due Jan. 3, 2012 linked to West Texas Intermediate light sweet crude oil offer investors seeking an autocallable note an unusual opportunity to get direct exposure to the price of oil, sources said.

"I see autocallables referencing oil that are linked to an index, but not so much linked to the commodity price," said Frederick Wright, partner and chief investment officer at Smith & Howard Wealth Management.

Specifically, the notes are linked to the WTI light sweet crude oil futures contract on the New York Mercantile Exchange, which is a key international pricing benchmark.

Oil underliers

Investors looking for exposure to oil via an autocallable structure have recently used notes linked to either the S&P GSCI Crude Oil index or oil stocks such as Anadarko Petroleum Corp. or BP plc, according to data compiled by Prospect News.

Additionally, some issuers have offered autocallable notes linked to the Energy Select Sector SPDR fund, which tracks the stock price of oil and gas companies in the S&P 500 index, an even less direct correlation to the price of crude.

"I haven't seen a deal linked directly to oil futures," said a market participant.

"It doesn't shock me though. You don't see that stuff very often because most commodities curves are contangoed, so the economics don't look that attractive."

A commodity is known to be in contango when the forward price is above the spot price, which means that when the commodity futures contract rolls into a new monthly contract, the investor incurs a negative rolling cost, which erodes the returns.

Barclays' notes offer a quarterly opportunity for early redemption with the potential for an annualized call premium of 9% to 13%, according to a 424B2 filing with the Securities and Exchange Commission. The premium rate will be set at pricing.

If the asset price closes at or above its initial level on a valuation date, the notes will be called at par plus the call premium. If the notes are not called and the final price is greater than or equal to the protection level - 75% of the initial price - the payout at maturity will be par. Otherwise, investors will share fully in losses.

Higher price range

Crude oil prices are currently trading at about $89 a barrel, noted Matthew Bradbard, president of commodity brokerage MB Wealth.

"I don't want to be long oil for the next year. I want to be able to short and to go in and out," he said.

"The price is trading in an $18 range right now, and we're at the upper end of that channel.

"A 25% protection on the downside is nice, but you can breach that barrier any day."

For some, the quarterly observation dates represent the greatest challenge.

"This is options European-style: The call can only be exercised at certain dates. You're highly constrained. Why would you want to do that? If it was an American-style option, you'd exercise the option at any time," said Michael Frankfurter, a financial adviser with commodity trading firm Cervino Capital Management.

"In general, these notes sold by investment banks can be replicated in a much less expensive way and with a finer degree of control by investing directly in the futures market," he added.

Good for bulls

But others said that the note could meet the needs of certain investors depending on their risk/reward profile.

"I think the terms are pretty attractive," said Wright.

"A 25% drop from $89 a barrel would be pretty significant.

"For somebody bullish on oil, that's a way to potentially make money from that bullish viewpoint and have significant protection on the downside."

The notes (Cusip 06740PW85) will price Dec. 21 and settle Dec. 27.

Barclays Capital Inc. is the agent.

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