Barclays' notes tied to Hang Seng China seen as risky given absence of downside protection

By Emma Trincal

New York, Feb. 28 - A two times leveraged note with no buffer linked to the stock market benchmark for mainland China was seen as risky by market participants who said that alternatives could be obtained at a cheaper cost.

Barclays Bank plc plans to price 0% Super Track notes due March 28, 2013 linked to the Hang Seng China Enterprises index, according to a 424B2 filing with the Securities and Exchange Commission.

The payout at maturity will be par plus double any index gain, up to a maximum return of 45% to 55%. The exact cap will be set at pricing. Investors will be exposed to any decline in the index.

The Hang Seng China Enterprises index tracks the performance of all the H shares - which are Hong Kong-listed shares traded in Hong Kong dollars - of companies incorporated in mainland China.

"It's a pure China play, a bet on [the] mainland," a market participant said.

"China out of the BRICs was the biggest loser last year."

BRIC is an acronym that refers to Brazil, Russia, India and China.

Asymmetrical

Clemens Kownatzki, chief executive officer of FX Investment Strategies LLC, an advisory firm specializing in global financial markets, said that the risk/return profile of the notes was a concern.

"This is a type of note that's extremely risky," he said. "Why would I want to cap my upside without capping the downside? Anytime somebody tells me the upside is capped, I need to have a structure that's going to be very cost effective or [offer] some kind of protection. If I'm locked in for two years, I can't think of any reason I would want to do this."

Options alternatives

Kownatzki said that for that type of payout profile, alternatives were available to investors for less cost.

"If I want two times leverage, I could buy a futures contract. Or I could leverage an option contract. You can trade options on any index," he said.

"I could easily do this in any numerous types of options strategies and get at least some protection on the downside."

Kownatzki said that an option strategy that would resemble this trade would be a barrier option, "but with a barrier only on the upside."

He explained that the cap was the equivalent of the premium an investor would receive by shorting a call option.

"By selling a call, you collect a premium. If it goes up above the break-even, you have no way to capture this upside," he said.

"This note is kind of a little bit like a barrier option except that you get your payout not from a premium but from the index performance."

Too limiting for bulls

The cap was what made the product unattractive to the market participant, who has a bullish view on China.

"I guess what I don't understand is the cap. If you're bullish on China, why would you want a cap? There's leverage; there's a cap. One feature offsets the other. If you're going to be boxing with all sorts of equipment, you shouldn't be boxing. You should just be playing chess," he said.

The notes will price on March 28 and settle on March 31.

The Cusip is 06738KCT6.

Barclays Capital Inc. is the agent.

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