Barclays’ leveraged notes tied to Dow, Stoxx basket show attractive terms, but timing is key

By Emma Trincal

New York, May 17 – Barclays Bank plc’s 0% Leveraged Index Return Notes due May 2021 linked to a basket consisting of the Dow Jones industrial average and the Euro Stoxx 50 index, equally weighted, offer an attractive structure, advisers said. The intermediate term of three years can be a drawback for some, however, given current market uncertainty and the odds of a bear market striking during the period, one of them said.

The payout at maturity will be par plus 140% to 160% of any basket gain, with the exact participation rate to be set at pricing, according to a 424B2 filing with the Securities and Exchange Commission.

Investors will receive par if the basket falls by up to 20% and will be exposed to any losses beyond 20%.

Simplicity

“I kind of like those plain-vanilla notes. You’ve got buffer on the downside, leverage on the upside. It increases the odds of beating the market,” said Steve Doucette, financial adviser at Proctor Financial.

As the structure is simple, advisers can better concentrate on analyzing the underlying exposure, he said.

“It’s an interesting blend. You’re blending the U.S. and Europe...The U.S. has done better. But it gives you global diversified exposure.”

Euro banks

One thing to consider, he noted, is the heavy weighting of banks in the Euro Stoxx index. As the top sector, financials represent 21% of the index.

Monetary policy, which remains accomodative in Europe, is putting pressure on European banks’ margins, he noted.

Stocks of European financial institutions have underperformed their U.S. counterparts significantly since the financial crisis, he added.

“We know that interest rates are rising here. They’re not rising there. You can’t really tell if European banks are going to do well in the next few years because it depends on how fast they will raise interest rates.”

Overrated credit risk

Doucette’s main objection regarding the product was its length. He downplayed credit risk exposure.

“When I talk to other RIAs, they can’t get over the credit risk. That’s why they don’t do structured products. I tell them you stick with the top banks in the world.”

His concern was market risk and how to time the trade in a significantly old bull market.

Timing the bear

“If we continue a run for the next three years, great. That would be a 12-year bull run and I have my doubts about that,” he said.

The current bull market, which began in March 2009, is the second-longest one in history after the one, which began in October 1987 and ended in March 2000.

“We know there will be a bear pullback. It’s a timing thing. Timing is tricky three years out.”

Doucette said that a very short-term trade or a longer-dated one would decrease the chances of losing money in a bear market.

“If you play it short, like one year out, you can hope to capture the last leg of this bull market,” he said.

“Or go longer, five years for instance, that way you have a higher probability of the market coming down and rebounding.

“I like the note. The leverage, the uncapped upside, the buffer: it’s all good. I’m not sure it’s the perfect timing though.”

Fees eyed

Another downside to the notes was the cost, he said.

The fee is 2.225% to which a 0.75% hedging charge is added, bringing the total cost close to 3%.

“Nice little gain for the brokers,” he said.

“It wouldn’t matter to us anyway. As an RIA we would renegotiate the fee.”

Surprisingly good

Matt Medeiros, president and chief executive of the Institute for Wealth Management, said he is bullish on the underlying for the term.

“I like this note. I like the two indices. This basket represents a nice core allocation strategy,” Medeiros said.

“I like the term, too. We think those two indices will do well over the next few years.

“The size of this buffer is also very attractive for those indices.

The upside payout was also appealing to this adviser.

“I think it’s pretty attractive to get that type of leverage with no cap on a three-year note. Getting those terms used to require a longer maturity, at least five years. The market has changed. I’m actually surprised by those terms.

“I think it’s a good note.”

The notes will price in May and settle in June.

BofA Merrill Lynch is the agent.

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