Barclays' market plus notes due 2015 linked to Euro Stoxx 50 offer short-term bullish exposure

By Emma Trincal

New York, Nov. 14 - Barclays Bank plc's 0% market plus notes due May 20, 2015 linked to the Euro Stoxx 50 index should appeal to bullish investors seeking exposure to European stocks for a relatively short investment term, sources said.

If the index finishes at or above the barrier level, 80% of the initial level, the payout at maturity will be par plus the greater of the index return and the contingent minimum return of 0%, according to an FWP filing with the Securities and Exchange Commission.

Otherwise, investors will lose 1% for every 1% that the final index level is less than the initial level.

Steve Doucette, financial adviser at Proctor Financial, said that the 18-month duration is attractive but comes at a cost.

Foregoing the yield

"They kept it short. That's how the note is built," Doucette said.

"But you have to pay for that. The first thing is that you don't get paid the dividends, and two, you don't have a buffer. It's just a barrier," he said.

Investors in the notes do not receive dividends as it is the case with most structured notes except for those tied to a total return index.

"I hate to give up dividends, especially on this index," he said.

The Euro Stoxx 50 has a 2.85% annual dividend yield, which would represent an opportunity cost of about 4.25% for the period, he noted.

"When you think that over the last 80 years, dividends have contributed to 44% of the S&P 500 return, you don't really want to skip the dividends," he said.

"We always try to find notes that are tied to total return indexes whenever we can. Can we get an index on the euro zone that would pick up the dividends? That would be my first question. It's important because you're giving up the total return for a simple one-to-one on the upside. I know there is no cap, but you really don't get any leverage or return enhancement."

Buffer wanted

Doucette said that he is not a market-timer and that he prefers buffers over barriers for more protection as market corrections, unpredictable in nature, may occur at any time.

"I don't like the barrier, which can precipitate a steep decline when it's hit," he said.

"If I had to restructure this deal, I would try to go for a buffer, and I guess I'd have to extend the duration.

"A buffer is always better. It gives you a real chance to outperform the benchmark, while your chances are reduced with the barrier.

"Even if you get a 20% protection with the barrier, it's not a guarantee, while the buffer protection is almost a guarantee."

Doucette's goal would be to make sure the tenor could be kept under a limit.

"I'd have to take a look at it and see how long I'd have to extend the maturity. I would want to know if I can get a buffer within a 24-month window," he said.

"I am not in the business of predicting the direction of the market, but you could imagine that the short term could give you a little bit of momentum. I'd still rather have a buffer because you never know when the bull trend is going to end. Mom and Pa are jumping on board, and that's always a good contrarian indicator. So I would stick to a buffer even though the case can be made that you could still have a little bit more growth ahead of us."

Bullish

Matt Medeiros, president and chief executive of the Institute for Wealth Management, said that the short duration of the note is very appealing, especially combined with the absence of any maximum return on the upside.

"We've seen quite a bit of interest in the euro zone space. People are betting on rising equity prices in Europe," he said.

"This note has the potential to give you full upside exposure. I like that very much, especially for this asset class. I like the fact that there is no cap.

"With the recent action the ECB has taken, you get a sense that they really want to create an environment for stock prices to increase."

In an effort to fight deflation and encouraged by a low level of inflation, the European Central Bank cut interest rates last week by 25 basis points to 0.25%, setting interest rates close to zero as it is already the case in the United States and Japan.

"The 20% downside protection is also very attractive for this asset class over the 18-month period," Medeiros said.

"All and all, it's a pretty interesting offer. The short-term duration is adequately priced for the benefits that are provided.

"If they had offered a longer duration, for instance a 24 month or 36 month, I would have wanted to see some leverage on the upside but only if the no-cap feature remained in place."

Barclays is the underwriter. JPMorgan Chase Bank, NA and J.P. Morgan Securities LLC are dealers.

The notes were scheduled to price Friday and settle Wednesday.

The Cusip number is 06741TY43.

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