Barclays' barrier notes with 40% cap linked to S&P 500 offer absolute value, fair protection

By Emma Trincal

New York, Jan. 19 - Barclays Bank plc's 0% barrier notes due Feb. 3, 2014 linked to the S&P 500 index give investors a fair shot at outperforming the benchmark given some of the structure features, including a high cap, a low barrier as well as an absolute value payout offered in some conditions, sources said.

A barrier event will occur if the index ever closes below the barrier - 58% to 63.5% of the initial index level - during the life of the notes, according to a 424B2 filing with the Securities and Exchange Commission. The actual barrier will be set at pricing.

If the index return is positive, regardless of whether a barrier event has occurred, the payout at maturity will be par plus the index return, subject to a maximum return of 40%.

If the index return is negative and a barrier event has not occurred, the payout will be par plus the absolute value of the index return.

If the index return is negative and a barrier event has occurred, investors will be fully exposed to the index decline.

Reasonable cap

"It's kind of a neat note," said Steve Doucette, financial adviser at Proctor Financial.

Doucette said that he likes the 40% cap for the two-year term.

"A 20% annualized return seems reasonable when you think of the performance of the S&P 500," he said.

The S&P 500 finished the year 2011 flat.

"It's probably a reasonable play," he said, commenting on the upside potential.

Should the barrier event occur, the 40% cap, which applies to the upside whether the barrier is breached or not, is not a real issue in his view because of the slim odds of the index rising from a 40% loss to a 40% gain.

Bad if it breaks

"If you break the barrier, theoretically, you wouldn't have to worry about the cap," he said.

He gave the example of the index falling 40% from 100 to 60. In order to go back to the 100 initial level, the benchmark would have to rise by 66%.

"You would need a much bigger move on the upside to make up for that loss. Chances are it wouldn't happen," he said.

While a negative scenario would represent a substantial loss, the chances of the barrier event occurring are reduced by the low level of the barrier, he said.

Outperforming the index

"You've got 40% of protection, and with the absolute value component, theoretically you could have an 80% outperformance," he said.

That's because assuming the barrier was set at 60% and that the index dropped by 40%, in the absence of a barrier event investors would receive a 40% positive return, or 80 percentage points more than the actual benchmark performance.

"The way it's structured gives you a fair shot at outperforming the benchmark," he said.

Good entry point

Matt Medeiros, president and chief executive at the Institute for Wealth Management, agreed that the notes offer an attractive upside potential.

His reasoning is that the S&P 500 offers a good entry point.

"This note sounds interesting," he said.

"I like the S&P 500 as an asset class right now. The benchmark is still down 20% off the tide of 2007. And there was no gain in 2011. Considering what happened in '08 and '09 and relative to what it is today, I don't see that there is a great likelihood to have a 40% downturn within the next two years.

"The low barrier gives a pretty generous opportunity for a positive return."

Barclays Capital Inc. is the agent.

The notes will price Jan. 31 and settle Feb. 3.

The Cusip number is 06738KJ93.

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