Barclays' 11.5%-15.5% autocallables linked to indexes, oil fund to hit the market at good time

By Emma Trincal

New York, Oct. 27 - Barclays Bank plc's 11.5% to 15.5% autocallable yield notes due Nov. 1, 2012 linked to a fund and two indexes are "complex" and risky, a financial adviser said. But the timing could not be any better, a market participant noted.

The notes will price on Friday, one day after a significant global rally.

The notes are tied to the S&P 500 index, the Russell 2000 index and the United States Oil Fund, LP, according to a 424B2 filing with the Securities and Exchange Commission.

Interest will be payable monthly.

The notes will be called at par if each underlying component closes at or above its initial level on Feb. 2, May 2, 2012 or Aug. 2, 2012.

The payout at maturity will be par unless any underlying component closes below 60% of its initial level during the life of the notes, in which case the payout will be par plus the return of the worst-performing underlying component, up to a maximum payout of par.

For Matt Medeiros, president and chief executive of the Institute for Wealth Management, the notes present two major drawbacks: complexity and downside risk.

Three cups

"It feels like the three cups magic trick where the little bowl moves around the cups and you're trying to figure out where the bowl is," he said.

"Here it's the same with the three components: We're going to move these cups around and hopefully at the end, you'll pick the right cup with the return.

"It's too complicated. You have to spend a lot of time understanding it, and it's not something easy to explain to a client."

No principal guarantee

Investors could suffer "significant losses" as the notes do not guarantee any return of principal, the prospectus warned in the risk section.

If any of the three components on any day triggers the knock-in event and if the least-performing component finishes negative, the notes will be fully exposed to the losses of that reference asset, according to the prospectus.

"I don't feel like there is enough downside protection," Medeiros said.

"The 60% level threshold is good, but you can hit this barrier any time and it can be triggered by any of the three components.

"I would opt for three notes with some downside protection and each tracking one of these indexes individually," he said.

Post rally

However, three factors mitigate the risk of this product, sources said.

The first one is timing. Stocks surged on Thursday in reaction to European leaders reaching a deal to stem the European debt crisis.

The S&P 500 index rose by 3.43% to 1,284.59, its highest level since the beginning of August.

"After a rally like [Thursday], obviously, the 60% barrier is even harder to breach," a market participant said.

"This recent run-up is certainly very helpful, especially with the deal pricing one day after this huge rally.

"We'll have to see what the market will be like [Friday], but as of now, they couldn't have asked for a better pricing date for their deal."

The second factor is the coupon.

"You also have at least 11.5% in coupon, that's an additional cushion. It ought to do well," the market participant said.

Deep barrier

Third is the protection afforded by the barrier.

Medeiros said that his real unease with the product is not so much risk but rather the fact that the product is "too complicated."

Risk, he said, is mitigated by the 60% downside barrier, which allows for losses of up to 40%.

"My real concern is not so much the risk," he said.

"I expect the market to continue to be volatile, but a 40% pullback, I don't see it.

"In that respect, the note could be attractive if you don't mind the complexity."

Correlation

Those multi-asset products are called worst-of because the return is linked to the worst performer of the group of underlying assets.

Typically, those products exhibit less risk when there is a high correlation between the underlying assets, a structurer explained.

With several underlying components, especially uncorrelated ones, the odds of losing money are greater. This is how the structure is usually able to pay a high coupon, he said.

Medeiros noted that correlation between asset classes in general has increased due to the high level of volatility seen in the market.

"Correlation levels between those three underlying are not a concern for me because when volatility is high like now, asset classes become more correlated anyway," he said.

"The market gets choppy, people liquidate, and that's when correlation between asset classes becomes very high.

"If we see a pullback in the S&P 500, you'll see a pullback in the oil fund as well."

Overall, the barrier and the timing of the deal offset some of the negative aspects of the product, according to the market participant.

"It's risky for sure," he said.

"But there is always something in a deal that keeps some folks away.

"To me, the combination of [Thursday]'s rally and the barrier makes the deal rather attractive."

Barclays Capital Inc. is the agent.

The notes will settle on Nov. 2.

The Cusip number is 06738KYN5.

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