Barclays' $103.38 million issue of notes linked to Brent crude biggest commodity deal of year

By Emma Trincal

New York, Sept. 17 - Barclays Bank plc priced the largest commodities deal of the year so far with its $103.38 million of 0% buffer enhanced notes due Sept. 29, 2014 linked to the Brent crude oil futures contract, according to data compiled by Prospect News.

The structure of the notes and the choice of the underlying made the deal attractive to some among the oil bulls who believe that the commodity is poised to reach new highs amid geopolitical tensions, some sources said.

If the final price of Brent crude is greater than or equal to the 85% buffer level, the payout at maturity will be par plus the greater of the 5.47% contingent minimum return and the asset return, subject to a maximum return of 15%, according to a 424B2 filing with the Securities and Exchange Commission.

Otherwise, investors will lose 1.1765% for every 1% decline beyond the 15% buffer.

Barclays with JPMorgan Chase Bank, NA and J.P. Morgan Securities LLC were the agents. Pricing was Thursday.

Smart play

Dean Zayed, chief executive officer of Brookstone Capital Management, said that the terms of the deal were "very appealing," in particular, the short duration.

"That's a good structure. I love the short-term one year," he said.

"The buffer is attractive. The notes some have downside protection. The return is pretty competitive too. You have this minimum, and the 15% cap is pretty high given the short term. It's only a one year.

"I can see why they printed so much of it."

More investors have turned bullish on oil recently, he noted, in part due to geopolitical instability in the Middle East and fears over supply disruptions.

"It's a smart way to play crude oil if you think the price of oil is not going to crash in the next year," Zayed said.

"There's a lot of instability in some parts of the world, in Syria in particular and in the Middle East.

"Oil is not going to go down much. If anything, it's going to go higher. The U.S. is on its way to potentially reach energy independence, but it will take some time. I am not banking on a sudden, overnight decrease in demand for oil just because U.S. oil production levels have increased.

"Everything in this product is compelling: the duration, the underlying, the downside protection, the cap, the geopolitical context. All these factors are very solid. I can see why it was a success."

Insufficient upside

Steven Foldes, president and chief executive of Foldes Financial Management LLC, disagreed. He said that he bought oil at the end of last year on the view that oil prices would soar in the event of a crisis. But the cap on the notes was not enticing, in his more bullish view.

"I've seen better notes tied to oil, including one also issued by Barclays that offered a higher minimum contingent return, some downside protection too and unlimited upside," he said.

"To buy an oil note, one has to expect a potentially significant increase primarily because in my view the value of oil is driven by geopolitical factors. If I buy such a note, I would expect unlimited upside.

"We've seen the price of oil skyrocketing in 1973 and 1974 as a result of the Arab embargo put in place in reaction to the war with Israel. There are many factors that may trigger a crisis in the Middle East. In our view, the main one is a tension between Israel and Iran, which is why we bought crude oil in December."

He purchased exposure to oil at the time through two exchange-traded products: the PowerShares DB Oil fund, which tracks futures contracts on WTI light sweet crude oil, and the iPath Pure Beta Crude Oil ETN, which offers exposure to the Barclays WTI Crude Oil Pure Beta Total Return index.

"We were concerned about a flare-up in the Middle East, particularly between Israel and Iran," Foldes said.

"We don't see [the] oil price moving so much due to supply and demand factors, although the abundant U.S. oil supply is often the main rationale for those who expect oil prices to stay flat or even go down.

"In our view, oil prices have the potential to surge in reaction to a geopolitical crisis. If a crisis intensifies, oil prices will explode, and as an investor we have to be compensated for taking the risk."

Foldes said that there were several reasons for "being concerned" about the Middle East but that not all carried the same weight.

"Syria and Egypt can't stop the flow of oil. But Iran has threatened to close the Strait of Hormuz. If such a threat materializes, oil prices will surge. This stoppage of oil flow would be a disastrous scenario, one that would cause oil prices to skyrocket. If our bullish view on oil is based on the notion that such scenario could very well happen, what's the point of capping our upside at 15%? We want to fully participate in the upside and be rewarded for the geopolitical risks we're taking as investors. I would never buy a structured note unless the cap was significantly high. Oil is volatile. It has the potential to go up way above 15%.

"The 15% downside protection is nice, but it wouldn't do much if you had a dramatic decline. Honestly, I'm not sure I understand why people liked the deal so much, which they obviously did. Maybe they think that oil will trade range bound and they liked the coupon," he said.

Trade-off

Philippe Comer, managing director, head of commodities structuring - Americas at Barclays, told Prospect News that "we've done oil deals this year that had no cap. But then, you were gaining exposure more quickly to the downside. There is no free lunch.

"With this one, you have a buffer, not a barrier. Once you go beyond the buffer, you lose some of your principal but progressively, at a rate of 1.1765%. It's not like having an 80% barrier, for instance, and if oil is down 21%, you lose 21%.

"It's always a trade-off. You can either have no cap on the upside, but you'll get a greater exposure to the downside. Or the other way around like with this deal.

"It's just two different ways to structure the risk. In both cases, we've created notes for investors who anticipate higher oil prices in response to what we perceive as greater demand for these products right now."

The fee was 1%.

The Cusip number is 06741TK89.

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