Barclays' upcoming contingent return optimization notes linked to corn target moderate bulls

By Emma Trincal

New York, Oct. 26 - Barclays Bank plc's upcoming 0% contingent return optimization securities due Nov. 16, 2012 linked to corn futures contracts are aimed at investors who are moderately bullish on corn but want to play it safe, sources said.

"It's one of those deals where you give up some of the upside to get some downside protection," a market participant said.

If the final price is greater than or equal to 85% of the initial price, the payout at maturity will be par of $10 plus the return, subject to a minimum return of 9% and a maximum return of 17% to 24%, according to an FWP filing with the Securities and Exchange Commission.

Otherwise, investors will be fully exposed to the decline.

The exact cap will be set at pricing.

Popular agriculture

Commodities deals linked to a single commodity have gained popularity over the last few months, said Bruce Kavanaugh, vice president at Pacer Financial Inc., a distribution firm specializing in exchange-traded notes.

"We're starting to see more creation of agriculture-based types of products as commodities continue to be important components to clients' portfolios," he said.

"It's related to the emerging market story. It's about those countries that are right now growing and importing agricultural products from the U.S., in particular corn and wheat."

15% is thin

But for Don Roose, president of U.S. Commodities, a research and risk management firm specializing in grains and livestock, the downside risk makes those notes unattractive as the 15% downside protection provided by the soft barrier is probably insufficient.

"As the world economy is slowing down, demand could continue to slow down as well," he said.

The notes would not be suitable for the very bullish investor due to the cap, according to the prospectus.

But they would not be a good fit for the bearish investor either because the downside cushion would not be sufficient, a view Roose said that he held, which is why he found the product unattractive.

"I would be more concerned about a downside greater than 15% than missing some of the upside above the cap," he said.

"I know the strategy they're doing, I'm familiar with it, but I don't like the deal.

"You can lose your principal, and yet you still don't get all of the upside potential."

Sources said that the notes may be a better fit for investors who are only mildly bullish or even mildly bearish on corn as the product may outperform the futures if they're right.

For instance, if the futures price finishes anywhere above the 85% trigger price but below the 9% contingent return, investors would be picking up extra gains.

How's the weather?

But Roose said that he was too bearish to embrace this view.

"I'm confident that the world will produce enough to satisfy the demand, which will put a downward pressure on prices. The only way I could be wrong is if we see some crops in the U.S. or in the world that have problematic growing conditions, such as bad weather," he said.

"If the weather is not good, you could reach your cap.

"But if the weather is good, prices will go down by more than 15%," he said.

In addition, corn futures have reached "new highs" since their latest low in July 2010, he noted.

Corn has increased in price from $350 a bushel in July 2010 to $590 for the Dec. 12 corn futures contract, he said.

If prices were to go back to their July 2010 levels, the more than 40% decline would be substantial and would translate into an equal loss of principal for the investor in the notes.

"Those recent highs suggest that the market could go back to its fundamental levels of 18 months ago. That means a sharp decline in prices, a decline much greater than just 15%," he said.

The notes (Cusip: 06741L674) are expected to price on Nov. 4 and settle on Nov. 9.

UBS Financial Services Inc. and Barclays Capital Inc. are the agents.

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