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Published on 11/1/2010 in the Prospect News Structured Products Daily.

Barclays' capped leveraged notes linked to MSCI Brazil index to attract mild bulls on Brazil

By Emma Trincal

New York, Nov. 1 - Barclays Bank plc's upcoming 0% Capped Leveraged Index Return Notes due November 2012 linked to the MSCI Brazil index may appeal to investors moderately bullish on Brazil who seek protection against the risk of a Brazil stock-market bubble bursting, sources said.

The payout at maturity will be par of $10.00 plus double any index gain, up to a maximum payout of $12.40 to $12.80 per note, according to an FWP filing with the Securities and Exchange Commission.

The exact cap will be set at pricing. Investors will receive par if the index falls by up to 10% and will be exposed to any decline beyond 10%.

Carl Kunhardt, director of investment management and research at Quest Capital Management, said he liked the notes for a variety of reasons, including the reference asset, the maturity and the payout structure.

What's not to like?

"I like everything about the note. It's the kind of products I like to buy," he said.

"While I'm not crazy about leverage, not all leverage is bad, and anytime you get more than the index [return], you've got to have leverage."

Kunhardt said that he "likes the 10% buffer" because it gives investors a lower level of risk compared to a direct investment in the exchange-traded fund.

"The 24% to 28% cap seems to be in line with the underlying, although we won't know the final level until they price," he said.

"I particularly like the two-year term.

"It's going to be a little bit volatile, because it's Brazil. But it's going to be less volatile than the ETF even though it's leveraged, and that's because of the point-to-point payout. The day-to-day movements of the index are irrelevant here. Over the two years, it's Brazil. And it's going to be up."

As with most structured notes linked to equity, these do not offer investors any dividends, an important difference from a direct investment in the index stocks, according to the prospectus.

Kunhardt said that foregoing dividends was part of a "trade-off."

"You forego the dividends, but you get the buffer. An ETF investor is not getting a buffer. There's a trade-off for everything," he said.

"I like the simplicity of the deal. It's a fairly straightforward way to invest in Brazil."

Bubble red-flag

Some investors were more skeptical about the product.

A family office principal raised the concern that the Brazilian equity market may be in a bubble, saying that "I'm not alone in worrying about the bubble bursting anytime. When? No one can tell."

He said that a lot of money has poured into Brazil over the past two years, leading to a significant rise in Brazilian stocks.

The MSCI Brazil index is up approximately 4.5% for the year and 13% for the past 12 months. But over the past two years, the ETF has doubled in price.

"You've got plenty of advisers who believe that Brazil is the future. Is this going to continue for very long? I don't know. All I know is that when I see something that's being talked about a lot in the news, I become a little bit nervous.

"Now that we just had the [Brazilian] elections, we'll have to see what the impact of the political environment is going to be."

On Sunday, Brazil elected Dilma Rousseff of the governing Workers' Party, or PT, as its new president.

"The families I deal with are very concerned about risk management. In fact, it has become one of their priorities," the family office principal said.

The restricted liquidity, which characterizes most structured notes, he said, somewhat offsets the risk-reducing benefit of the buffer.

"I think a lot of my clients are afraid of structured notes. They are skeptical and suspicious about them. If someone had a 15% to 20% allocation to emerging markets, then maybe. But the cost of those products, their relative illiquidity in general is always a concern," he said.

Brokerage platforms

Kunhardt said that he liked the note and may even consider it. But given the intricacy of distribution agreements, he was not sure whether he could have access to the product or not.

Merrill Lynch, Pierce, Fenner & Smith Inc. is the agent for the deal.

Kunhardt said that he is on the "Raymond James platform."

"Last month, [Raymond James] showed us notes issued by Morgan Stanley, Wells Fargo - actually, a vast majority were Wells Fargo products - but also Credit Suisse, HSBC, a couple of JPMorgan ones. But I don't recall seeing Barclays," he said.

"If I wanted to buy the Barclays paper out of the Raymond James platform, I'm not sure I could. I would be curious to know."

Messages to Raymond James were not returned.

"I think this is pretty much how this market operates. We'll have notes that Merrill Lynch is not going to have on their platform.

"The issuer is going to go with someone they have a relationship with. It's not like buying an ETF or a stock that's listed on an exchange. With structured products, you really buy the notes from the brokerage."

Barclays did not comment on distribution issues.

The notes are expected to price in November and settle in December.


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