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Published on 7/14/2008 in the Prospect News Structured Products Daily.

Barclays protects GM-linked reverse convertible against 60% price drop; JPMorgan links to railroads

By Kenneth Lim

Boston, July 14 - A Barclays Bank plc reverse convertible linked to the stock of General Motors Corp. bears a generous barrier level that reflects how volatile the shares have become, an investment advisor said.

Barclays links to General Motors

Barclays priced $2 million of 20% reverse convertible notes due Jan. 14, 2009 linked to General Motors shares

Payout at maturity will be par in cash unless General Motors shares fall below the protection price of $3.97 during the life of the notes and finish below the initial price of $9.92 in which case the payout will be 100.806452 shares of General Motors stock. The protection price is 40% of the initial share price.

Barrier reflects underlying risk

The unusually low protection price was not a big surprise, given how poorly General Motors' common stock has been performing, said an investment advisor who did not buy the notes.

"The barrier is a function of how volatile the stock is and the coupon, and because GM is so volatile right now, banks can afford to offer more attractive terms to investors," the advisor said.

Barclays could have priced the product with either a low protection price or a high coupon, the advisor said.

"It doesn't really matter which way they do it," the advisor said. "I don't know, maybe psychologically some investors prefer better protection rather than a coupon that all the way out there. I guess if there's uncertainty about GM, investors might place more value on downside protection. You give up maybe 5 basis points on the coupon, but at 20% you're still getting a really good rate for a six-month investment, and you have a higher chance of getting that 20%."

General Motors' common stock (NYSE: GM) are currently trading near their 52-week low of $9.14 per share. The stock, which traded at about $37.03 a year ago, closed at $9.38 on Monday.

"The U.S. auto companies haven't been attractive for a long time," the advisor said. "I mean, just looking at the stock, it's been doing nothing but going down for years. Years. And I haven't heard anything recently that makes me think the industry is going to get better in the next six months. Have you heard anything?"

The advisor noted that recent reports speculated that the company may need to cut more jobs, that the company may cut production yet again, and that the company could be forced to file for bankruptcy.

A week ago, General Motors chief executive Rick Wagoner sought to reassure investors, saying that the company's cash position will "remain robust" through 2008. He made those comments after a Merrill Lynch equity analyst raised the possibility of a General Motors bankruptcy.

Notes still seem risky

"None of my clients hold structured products that are linked to GM, and I wouldn't advise them to hold it now," the advisor said. "There's just too much volatility. I wouldn't say it's highly unlikely that the stock isn't going to fall below $4."

The advisor said it may make sense to seek exposure to a slightly less volatile stock.

"Beyond a certain point, all that coupon they're offering you isn't really worth it," the advisor said. "Some of the really volatile stocks out there are really volatile for a reason. Like I said, maybe you give up 5 basis points on the coupon, but you still make maybe 15% in six months or a year, which is still good by most measures, but you're less at risk of investing in a busted product."

JPMorgan links to railroads

JPMorgan Chase & Co. plans to offer a series of notes linked to the not-often-seen railroad sector.

JPMorgan is pricing the zero-coupon buffered return enhanced notes due Aug. 6, 2009 linked to a basket of seven railroad stocks.

The basket consists of the Union Pacific Corp. with a 17% weight; Burlington Northern Santa Fe Corp., CSX Corp., Kansas City Southern and Norfolk Southern Corp., each with a 15% weight; Canadian National Railway Co. with a 13% weight; and Canadian Pacific Railway Ltd. with a 10% weight.

The payout at maturity will be par plus double any gain on the basket, up to a maximum return of at least 20.5%. The exact cap will be set at pricing.

Investors will receive par if the index falls by 10% or less and will lose 1% for every 1% decline beyond 10%.


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