Barclays’ $547.56 million leveraged notes tied to index basket draw enthusiasm among sellsiders

By Emma Trincal

New York, Feb. 5 – Barclays Bank plc’s $547.56 million of 0% capped return enhanced notes due Feb. 18, 2016 linked to an unequally weighted basket of indexes is the ninth-largest structured note offering to price in the registered U.S. structured products market since 2001, according to data compiled by Prospect News.

The notes, which JPMorgan distributed and priced last week, generated excitement among sellsiders amid a turbulent market environment in this early part of the year.

Among the top 10

“This seems to be the largest note I’ve ever seen. I remember seeing some delta-one notes that were large, but this is huge. I really like it,” a sellsider said.

The basket components are the Euro Stoxx 50 index with a 58% weight, the FTSE 100 index with a 21% weight and the Topix index with a 21% weight, according to a 424B2 filing with the Securities and Exchange Commission.

The payout at maturity will be par plus the basket return. Investors will be fully exposed to any losses.

The return of each basket component is leveraged two times up to a 21.14% cap. The downside exposure is offered on a one-to-one basis. The basket return will be the sum of each component return multiplied by its weighting.

“I don’t know how it ranks compared to other deals in the past, but it’s big,” a structurer said.

According to data compiled by Prospect News from 2001, UBS AG brought in 2006 the largest deal with $2 billion of 18-month 22% mandatory exchangeable notes linked to Time Warner Inc.

In 2005, Citigroup Funding Inc. priced the second-largest offering with $989 million of 5.6% SynDECS mandatory exchange notes linked to Genworth Financial Inc. featuring a three-year maturity.

Encouraging

“I love it. I think it is everything coming together,” the sellsider said.

“It’s a good, simple structure. It’s easy to understand. No moving parts. It’s short-dated. People are moderately bullish, not aggressively bullish. International markets have been beaten down, and many strategists point to them as the current opportunity. Most likely JPMorgan’s internal research is very much behind this theme.

“The timing is good. The pricing seems sharp.

“And this bodes well for the structured products market!”

Private bank

Sellsiders were trying to find out who was “on the other side” of the deal.

The deal “is for the private bank,” said a knowledgeable source familiar with JPMorgan’s distribution channel.

It was no surprise that a bank with a large private bank distribution network could have pulled off such size.

“It's a symbol of the enormous potential of the index-linked notes business, and at the same time it's a symbol of the limited number of key distribution partners in the U.S.,” a market participant said.

January effect

The timing in the year may have helped too.

“There is a little bit of the January effect,” the market participant added.

“People sell in December to take tax losses and then invest in January. The difference this time is there’s been a very volatile market that’s been contrary to people putting money to work.

“This deal goes to show that if you find the right strategy, you can put together something significant in size. But you have to have the right network. This is a major story for 2015.”

January has seen big offerings. On Jan. 29 for instance, Bank of America Corp. priced $297.38 million of 0% Accelerated Return Notes due March 28, 2016 linked to the S&P 500 index.

“It was a monster deal, and it was a roll from a previous position,” the market participant said. “All these people rolling into the new.”

During the closing week ended Friday, six offerings each in excess of $50 million were brought to market, according to Prospect News data.

However, no rollover or larger deal compared with the $547.56 million issue, which priced last Friday.

“JPMorgan comes out of nowhere. The market is very tough, and they come up with that. The structure is simple. One-to-one on the downside. Leveraged up two times on the upside and capped,” the market participant said.

JPMorgan was probably not as sensitive to the early-year inflow, said the structurer, who downplayed the January effect.

“JPMorgan tends to do things differently. They decide they’re going to direct their effort somewhere. It could be any time. And they put it out to bid,” he said.

Noticing that the issuer was Barclays and not JPMorgan itself, the market participant said, “It looks like they did a note to go into discretionary accounts. I’m sort of guessing, but the fact that Barclays is the issuer makes me believe that. They can’t issue their own deal for those accounts. They go to a third party to do that.”

Research-based

The underlying investment theme of the product was probably based on JPMorgan’s research recommendation, sources said.

“It goes mostly to one index, the Euro Stoxx, and the rest is split in two. It’s not a very complicated strategy. But it’s very compelling. I’m sure it’s based on their analysts’ recommendations,” the market participant said.

“Having challenges in the U.S. markets, you hedge against that by going into the non-U.S. markets.

“It goes to show that a big bank like JPMorgan can price half a billion all of a sudden if it brings a strategy that resonates with investors.

“Raising that much money in such a challenging market tells me that structured notes have a vast potential.”

Basket and leverage

The use of leverage applied to several basket components is a useful technique to enhance the upside, explained the structurer.

“Rather than putting a single index, using a basket of indexes makes things a little bit cheaper. If you look at the correlation, one could be up two times, another one down two times significantly and the other flat. There is a benefit in doing each one individually. It’s cheaper. The cost of the call options is lower, so you can get more leverage,” he said.

Currency hedge

Investors are showing increasing appetite for international equity markets in an effort to diversify away from U.S. stocks and to seek better valuations, but the currency risk, which has increased with the appreciation of the dollar relative to other currencies such as the euro and the yen, may constitute an impediment, explained Matt Medeiros, president and chief executive of the Institute for Wealth Management.

“That’s an interesting play. This basket provides an opportunity to capture some returns from markets that have been beaten up so much. Europe, Japan are still weak and riskier relative to the U.S.,” he said.

“But anyone investing in international equity should always look at what drives the returns: is it the market, or is it the currency fluctuations?

“There are overseas opportunities. But the currency risk has to be hedged. If you’re not hedged, you’re not going to capture the value of this investment.”

Investors in the notes, however, will not be affected positively or negatively by the fluctuations of the dollar relative to the other currencies, according to the prospectus.

“Sounds as if Barclays has taken the currency risk out of the equation,” said the market participant.

Since 2001

The deals compiled by Prospect News for the ranking of this product do not include exchange-traded notes.

They do not take into account some fixed-income products such as step-up notes, step-down notes, fixed-to-floating notes and capped floaters.

Only U.S. structured notes registered with the SEC are included.

The JPMorgan notes (Cusip: 06741UQC1) priced on Jan. 30.

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

The fee is 1%.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.