Barclays' bear Stars tied to Russell 2000 are designed for a wide variety of bears

By Emma Trincal

New York, June 8 - Barclays Bank plc's 0% bear Strategic Accelerated Redemption Securities due December 2012 linked to the Russell 2000 index, target investors seeking a digital return out of any bearish scenario, said structured products analyst Gurdeep Ubhi at Future Value Consultants.

If the final index level is less than or equal to the initial index level, the notes will be called and investors will receive par plus a digital percentage of 8% to 12%, according to an FWP filing with the Securities and Exchange Commission.

If the notes are not called, investors will lose an amount equal to the index gain.

"This is a digital bearish note and we don't see that many," said Ubhi.

"When we see a bearish note, it's often done under a leveraged buffered structure, not with a digital payout."

The short duration did not surprise Ubhi.

"Most bearish plays are short-term trades anyway because market falls in general are short-lived," he said,

For hedgers, bears

The notes would be suitable for investors with a bearish bias, possibly pursuing two different objectives.

"The first type of investor would just buy the notes to hedge an equity portfolio. The idea of hedging against the downside is that if the market is down, you get a positive return that may offset some of your losses in your long positions," Ubhi said.

"The second type of buyer would be the pure bear who is betting on a negative market direction and who wants to capture the decline to generate some gains."

Future Value Consultants offer several ratings for each product, which it typically measure against two different averages - first the category of "all other products" recently rated by the firm, which includes all structures; and second, products of a similar structure type.

In this case, Ubhi said that given the rarity of bearish digital or review notes, the ratings should preferably be compared against the overall supply.

Up, you're down

Beginning with the riskmap, a Future Value Consultants' rating that measures the risk on a scale of zero to 10, the notes reveal a level of risk greater than the average of all products, he said: the 4.69 riskmap for those notes is higher than 4.26, the average riskmap for all products.

The riskmap itself is the sum of the market riskmap and the credit riskmap.

"In this case, the higher riskmap comes down to higher market risk since the credit risk is lower," said Ubhi.

The market riskmap for these notes and all product types is 4.11 and 3.55 respectively.

On the other hand, this product's 0.58 credit riskmap is less than 0.71, the average of all products.

"It's clear that the market risk is greater here because there is full exposure to losses if the index finishes up positive. Most products offer some kind of buffer, or alternatively, a European or American barrier. Reverse convertibles often have a barrier and when they don't, they at least have a coupon that offset some of the losses. But this one has nothing," he said.

"On the credit side, the short duration is the main factor behind the somewhat lower risk. While many reverse convertibles are also short term, most other products have maturities of 18-months, two or three years. The longer the term, the greater the credit risk and this is why your credit riskmap here is limited," he said.

Risk-reward profile

Future Value's opinion of the risk-adjusted return is expressed in its return score. This rating is calculated from five key assumptions - neutral assumption, high and low growth environments, and high and low volatility environments. FVC calculates a risk-adjusted average return for each assumption. The return score is the best of these five returns.

This product generates gains when the index finishes negative. As a result of that, the most favorable scenario would be "low growth," he explained.

Under this assumption, the notes have a return score of 6.62, which is better than 6.47 for the average of all products.

The probability table associated with this product and based on the low growth assumption shows that investors have a 26.4% probability of losing more than 15% of their principal for a 55.4% chance of making more than 15% in profits.

"The return score is better than the all product types category because the digital coupon is higher than the average. Although you don't have downside protection, you are being fairly compensated for the risk you're taking with a potential return of 16% to 24% per annum even if the index is down by only a small amount.

"Getting 8% to 12% over six months is pretty high, especially when your return is linked to a less volatile asset like an index rather than a stock," he added.

'A pretty competitive note'

Future Value measures with its price score on a scale of zero to 10 the market value of the underlying components of the product. Calculated as a percentage of the initial investment, the score gives an estimate of the fees taken per annum. The higher the score, the lower the fees and the greater value offered to the investor.

With a 7.23 price score, this product offers more value than the 6.95 average of all products.

"It's decently priced. The terms they're offering are quite attractive, especially for the amount of time the investment is aimed for," he said.

"You may get cheaper options on a bear scenario than you may get on a long scenario... that may be another reason why the price score is high," he said.

The price score and return score are averaged to obtain the overall score of the product, which represents Future Value Consultants' opinion on the quality of a deal.

Compared to the average overall score for all products of 6.71, this product has a higher overall score of 6.92.

"It's just the result of a better than average price score and return score. You end up with a pretty competitive note," he said.

The notes will price and settle in June.

Bank of America Merrill Lynch is the underwriter.

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