Barclays' Super Track notes tied to Russell 2000 seen as standard, but three years 'bit long'

By Emma Trincal

New York, Aug. 28 - Barclays Bank plc's 0% Super Track notes due Aug. 31, 2016 linked to the Russell 2000 index offer "decent" terms, a market participant said, but the three-year tenor is on the longer end of the spectrum for this type of product, according to a structurer.

The payout at maturity will be par plus 1.15 times any index gain, up to a maximum return of 48.3%, according to a 424B2 filing with the Securities and Exchange Commission.

Investors will receive par if the index finishes at or below the initial level and at or above the 75% barrier level and will lose 1% for every 1% decline below the initial level if the index finishes below the barrier level.

Standard

"The terms look fair," the market participant said.

"There is some slight leverage on the upside and a cap of 16% per annum. It's decent. The 25% protection seems pretty good as well. And you have a barrier at maturity, which of course is always better."

But a structurer said that "for a leveraged note, three years is a bit long," adding that most products in this category have tenors in the one- to two-year range.

"It doesn't strike me as super long in term," the market participant said.

"At least it's not that long in duration given the terms that you get.

"The 3.25% fee is a little bit on the high end perhaps. You probably want to see less than 1% per annum. So a 2.5% or even 3% fee would have been preferable.

"It's true that generally, clients do like shorter-dated maturities.

"The 1.15 times leverage is closer to one.

"But it's all a question of balancing the different terms: duration, participation, protection.

"My guess is that what Barclays tried to do was to keep it as short as possible, and they got close to 100% participation. Three years was probably the shortest they could go.

"The participation is only slightly above 100, and there is a cap. Generally, for a participation close to 100, it would be nicer not to have a cap. But for a three year, they had to since you get that protection. A four or five year probably could have been done without a cap. But not on [a] three year."

For the structurer, the question was "whether or not you're going to outperform the index."

The dividend yield on the Russell 2000 is 1.72%.

"Over three years, you're giving up more than 5% in performance. So the 75% barrier is in effect only 80%," he said.

"A 75% barrier on a three year with an underlying that's paying nearly 2% is not all that attractive. I'd rather have no barrier and more upside."

Delta pricing

Investors in leveraged capped products such as this one, the structurer explained, should pay attention to the upside and compare it with a direct investment in the index.

"What clients do not always understand is that the cap is going to give you a lower participation. Your real participation rate is not going to be 115%, but less," he said, adding that it should be a concern for investors who want to redeem early," he said.

"You're long an in-the-money call with a delta of one, and you sell an out-of-the-money call at a 48% strike with a lower delta.

"Your real leverage rate will be the delta of the participation minus the delta of the cap, and it's going to be less than one.

"Your 15% outperformance will only be at maturity. If you exit early, there is still time left before maturity, and it's not to your advantage.

"If the market goes up, you lose flexibility. Say the index is up 10%. You may want to sell before maturity, but you're probably not going to find a decent price. The delta will move against you. That is the problem, especially for these longer structures. It would be less of an issue on a shorter tenor. Missing the dividend over six months is a different story than missing it over three years. But a longer-dated product like this one, you get stuck with a lower participation than the 115% because the cap works so much against you.

"The dividends were probably not enough to get that barrier in place, so they took some of the underlying performance away to finance the barrier, and that's the cap.

"Or it could be the fee. A 3.25% fee, I have to say, is pretty high.

"The bottom line I guess is that I like to keep the maturities of those leveraged capped deals as short as possible."

Barclays is the agent.

The notes were expected to price Wednesday and settle Friday.

The Cusip number is 06741TF77.

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