Barclays' $51.44 million notes linked to S&P GSCI Crude Oil seen as 'fair deal' for oil bulls

By Emma Trincal

New York, Jan. 20 - Barclays Bank plc's $51.44 million of 0% capped market plus notes due Jan. 25, 2012 linked to the S&P GSCI Crude Oil Index Excess Return offer an attractive upside potential for investors who are bullish on oil, sources said.

In addition, the structure provides some level of protection if a knock-out event does not occur. For bulls who don't anticipate this event - a drop of 20% of the index during the term - the notes are appealing, sources said.

Investors are exposed to losses if the index falls to or below 80% of the initial level on any day during the life of the notes. In this case, the payout at maturity would be par plus the index return, which could be positive or negative, according to a 424B2 filing with the Securities and Exchange Commission.

Otherwise, the payout will be par plus the greater of the index return and 8%.

In each case, the payout will be subject to a maximum return of 30.5%.

Bullish trend

"Frankly, it's a pretty good deal," said Matt Medeiros, president and chief executive officer of the Institute for Wealth Management.

"Most people anticipate the price of oil will go up over the course of the next 12 months.

"It looks like they'll be able to participate in the appreciation of oil. It's very unlikely that you'll have a downside."

Medeiros said that even if oil prices fell, the odds of a strong decline are limited.

"I don't see the price of oil going down in the next 12 months. A year from now, the price of oil will be higher than it is today. And if I'm wrong, I don't know if I'm going to be wrong by 20%," he said.

Part of his view was based on the tenor of the product.

"It's a one-year note. It's short term. I do like it," he said.

"It seems like a pretty fair deal."

Steve Doucette, financial adviser at Proctor Financial, said that the risk can only be assessed based on the volatility of the underlying.

Yet, he said that even in the worst-case scenario, investors are not subject to more risk than those buying the index directly via an exchange-traded note for instance. He also said that a 20% drop in the price of oil right now or even over the next year was "unlikely."

"Oil is coming back up. It's expensive again," he said.

The index return was 9.03% over the past year. The index lost 12.84% over the past three years and 5.7% in the past five years.

Upside and protection

"Assuming the barrier is not breached, the upside potential is attractive," he said.

"It's not a bad return for a one year. If the barrier is not breached, you get an 8% guaranteed and a return up to 30%. That's pretty good," Doucette said.

"You wouldn't want to get knocked out and be stuck with the index, but if you're bullish on oil, it's a reasonable play."

One of the most attractive aspects of the structure, he noted, is that investors have the opportunity to make money at maturity even if the index ends up lower, in the absence of a knock-out event.

"In theory, your index could finish down 17%, you would make 8% and you would significantly outperform the index," he said.

Doucette said that when structuring the product, the issuer created a cap to enable investors to benefit from the contingent protection and the contingent minimum return.

"Your cap pays for this protection. But at 30% on a one year, your cap is decent enough to make it worthwhile.

"This cap would only be problematic for the very bullish investor who believes that oil is going through the roof."

Oil rally, deals

Recent oil price moves have encouraged investors to make bullish bets on the commodity, sources said.

After trading between $70 and $85 in 2009 and most of 2010, oil started to rally in November when it broke the $90 price threshold. It traded at $91 a barrel on Friday, and many expect the commodity price to hit the $100 mark this year, according to sources.

The recent rally also fueled the pricing of notes linked to the price of oil, according to data compiled by Prospect News.

Three offerings have shown unusually large sizes.

On Jan. 7, Deutsche Bank AG, London Branch priced $75.92 million of 0% capped knock-out notes due Jan. 13, 2012 linked to the S&P GSCI Crude Oil Index Excess Return. Distributed by JPMorgan, the deal was very similar to the more recent one from Barclays, but its terms were slightly less favorable with a 25% cap instead of 30.5% for the same duration and knock-out buffer amount. The minimum contingent return was 7.75%.

On Jan. 12, Bank of America Corp. priced $41.66 million of 0% Capped Leveraged Index Return Notes due Jan. 23, 2014 linked to the price of light sweet crude oil. The deal had a very different structure with a longer maturity, a 10% buffer, a leverage factor of two and a 34% cap for the three-year term.

In addition, JPMorgan Chase & Co. on Jan. 6 sold $35.8 million of 0% daily liquidity notes due Jan. 9, 2015 linked to the Dow Jones - UBS Crude Oil Subindex 3 Month Forward Total Return.

JPMorgan Chase Bank, NA and J.P. Morgan Securities LLC are the agents for the Barclays product.

Fees are 1%.

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