Barclays' iSuper Track notes linked to real estate ETF offer yield, upside participation

By Emma Trincal

New York, March 5 - Barclays Bank plc's buffered iSuper Track notes due March 17, 2014 linked to the iShares Dow Jones U.S. Real Estate index fund are designed for conservative investors seeking a balance between growth and income along with reduced downside risk, sources said.

Noteholders will receive $10 per note each quarter, according to a 424B2 filing with the Securities and Exchange Commission.

If the fund's final share price is greater than the initial share price, the payout at maturity will be par plus the fund return, subject to a cap on the fund return of 6.5% to 10%. The exact cap will be set at pricing. Investors will receive par if the share price declines by 15% or less and will lose 1% for each 1% that it declines beyond 15%.

"This note gives you both income and growth. It's a nice hybrid," a market participant said.

"I haven't seen that type of structure on calendar offerings, not really. It's more of a customized type of product, one that would be offered on a private basis."

Investors receive a 1% coupon payable quarterly over the two-year period, which is 8% earned over the period, or 4% per year, according to the prospectus.

"You hate to give up a big fat dividend, and this note is compensating you for that. You break even on the dividend yield or a little bit ahead, and that's good," said Mike Kalscheur, financial adviser at Castle Wealth Advisors.

Dividend replication

The ETF tracks the price and yield performance of the real estate sector of the U.S. equity market as represented by the Dow Jones U.S. Real Estate index.

The fund pays a 3.58% dividend yield.

"They're trying to replicate the return of the index instead of having it based only on the performance," the market participant said.

"You get paid to hold the notes, and that's valuable."

Risk-averse style

The market participant said that the structure was particularly suitable for a more risk-averse type of investor who would tend to buy fixed-income securities for the predicable stream of cash flow and some degree of safety.

"I think this type of product is symptomatic of people searching for income," he said.

"The 15% buffer is good too. First, it's a hard buffer. And second, it gives you a fair assessment of this type of risk over two years."

The fund is up 7% this year and rose by 3.5% over the past 12 months.

"The U.S. real estate sector got off to a good start this year, and some believe it's only the beginning. Others are more cautious. It depends on your view," the market participant said.

"If you believe we've bottomed up in real estate, then you can get some exposure to the sector in a relatively short holding period.

"If you're right, you'll be compensated with the index performance. And if you're wrong, the coupon will limit your losses in addition to the buffer.

"This is really aimed at the risk-averse investor."

Protection bias

Kalscheur said that the notes were indeed rather defensive, perhaps too defensive for aggressive investors given the low cap. But for conservative investors, the risk/reward profile was appropriate, he said.

"The cap is just not very high," he said about the 6.5% to 10% maximum return tied to the fund's performance.

However, if one adds to the cap the 8% coupon paid for the two-year period, the maximum annualized return becomes 14.5% to 18%. On an annualized basis, the cap is 7.25% to 9%, he noted.

"It's a low cap, but there is a reason for it," he said. "First, you get a 15% buffer, which is bigger than the average 10% you would normally get. Second, you have this annual 4% coupon kicking in.

"At maturity, you've got as much as a 23% cushion before you can start losing principal," he said in reference to the total protection obtained when adding the 8% yield and the 15% buffer.

"If the market is really down, if it plunges by 23%, you're up 23% over the benchmark. You're outperforming quite nicely.

"Now obviously this is not for the very bullish investor. You shouldn't expect more than 10% upside in two years if you invest in this note. However, you're getting a lot of downside protection. That's the trade-off."

Kalscheur noted that the structure could be "very reassuring" for a client seeking exposure to the U.S. real estate sector or any other sector of the U.S. equity market given the combined coupon and buffer as a way to reduce the downside risk.

In addition, credit risk was not a concern with this product, he said.

"I like the credit right off the bat. Barclays is one of the top names out there," he said.

Risk versus reward

But the product may be too conservative for some investors, said Kalscheur.

"It's a very, very conservative way to get exposure to this sector. As much as I'm in favor of downside protection, I'm not really bearish on real estate," he said

"Perhaps one may argue that you're giving up too much upside for the downside protection. I personally see an equal opportunity between the upside and the downside.

"This one is heavily weighted toward the downside. But it's not a bad product.

"I may prefer a little bit less of a buffer with more upside potential, but that's just me.

"A lot will depend on where the market is on pricing day.

"In any event, it's not a stand-alone investment in the real estate arena, but I can see it as a good complement to an actively managed fund, like the Cohen & Steers funds we own."

Cohen & Steers, Inc. is a manager of a portfolio specializing in real estate securities, real assets and preferred securities.

The upcoming notes (Cusip: 06738KT68) will price March 13 and settle March 16.

Barclays Capital Inc. is the agent.

Recent deals

Barclays has issued other buffered iSuper Track notes using a structure that combines a coupon paid on a quarterly or semiannual basis with a performance-based capped and buffered payout at maturity.

The two most recent ones priced in December, according to data compiled by Prospect News.

On Dec. 27, Barclays priced $1.23 million of buffered iSuper Track notes due Dec. 30, 2013.

The tenor, the underlying fund, the coupon amount and the 15% buffer were identical to the upcoming deal. The difference was a higher performance cap of 22.5%.

The other one, which priced on Dec. 19, was a $14.25 million offering of buffered iSuper Track notes due June 22, 2015. These longer-dated notes offered a lower annual coupon of 1.885%, a smaller buffer of 10% but a higher cap of 50%.

The underlying basket for this deal consisted of the S&P 500 index with a 70% weight, the iShares MSCI EAFE index fund with a 15% weight, the MidCap SPDR Trust Series 1 with a 8% weight, the iShares MSCI Emerging Markets index fund with a 4% weight and the iShares Russell 2000 index fund with a 3% weight.

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