Barclays' Super Track digital notes tied to Russell 2000 are for moderately bullish investors

By Emma Trincal

New York, April 9 - Barclays Bank plc's 0% buffered Super Track digital notes due April 30, 2014 linked to the Russell 2000 index are designed for moderately bullish investors only, sources said.

Any large price movement to the upside at maturity would cause the notes to underperform the underlying benchmark, they noted, and the notes offer little incentive to the more bearish investor.

If the index return is greater than or equal to zero, the payout at maturity will be par plus the digital percentage, which is expected to be 12.5% to 15% (or 6.25% to 7.5% per annum) and will be set at pricing, according to a 424B2 filing with the Securities and Exchange Commission.

Investors will receive par if the index declines by 20% or less and will lose 1% for every 1% that it declines beyond 20%.

The fees are 2.45%.

Digital

Carl Kunhardt, wealth adviser at Quest Capital Management, said he likes the notes for their simple digital structure and because they fit his current market view.

"It's fairly plain vanilla," he said.

"I like all those digital barrier notes, particularly in a market which you expect to be range bound, a market with no huge losses and no great returns, which is really what I foresee. I don't really anticipate much downside. A 20% decline in two years would seem like a lot. I don't really see that."

Kunhardt said that in the family of enhanced return notes, his preference goes to digital rather than leveraged products.

"Generally, leveraged notes tend to have higher fees since the issuer providing the upside leverage has to hedge the risk," he said.

"The 2.45% fee in this digital product is kind of high, though. But it's OK."

Solid economy

Kunhardt said that he is not overly concerned with recent market moves, in particular, a sharp sell-off on Monday in reaction to the job figures released Friday.

"We had a four-week [period] of solid gains. The market can't go up every day," he said.

"I am still mildly bullish because the economic conditions in the U.S. remain pretty solid unless Washington messes things up. I don't foresee that because it's likely that we're going to have a Democrat president and a Republican Congress. As a result, not much is going to get done in the next four years. While it seems like a negative outcome, it may be good for stocks. It will be a neutral environment and the end of some form of uncertainty. At least you'll know what the rules are, which is what the market needs the most right now.

"In the meantime, the basic economic numbers are fairly good."

Kunhardt said that "the 20% downside protection covers me," adding that "a 6% to 8% return for a short note, why not?"

Better than corporate bond

One possible rival product could be a corporate bond, he said. However, at an equivalent credit rating quality, the structured note probably offers more value, he said.

Barclays has an A+ rating from Standard & Poor's.

"If you compare that to a corporate bond, you'd probably have to go further out on duration to get the same coupon on the corporate paper and you may have to go triple-B or double-B to keep the same coupon," he said

"So that's what the note gives you: an A+ bond with 24-month duration and a junk-bond-like return."

Bears beware

But for the more bearish investor, the deal offers little incentive.

"From a fundamental standpoint, it's reasonable if you want to participate in the upside and limit the downside risk and if you believe in the Russell," said Scott Cramer, president at Cramer & Rauchegger, Inc.

"But if you don't believe in the Russell - and I don't - then the risk/return profile of this note is not that attractive.

"I am not bullish on the market in general, and I'm certainly not bullish on the Russell, a more volatile index than the S&P 500 that will do worse.

"The upside reward is not that much. And while I don't really believe there will be much upside, if the index is going to decline, you need to be better compensated for the risk."

The notes (Cusip: 06738K2V2) will price April 26 and settle April 30.

Barclays Capital Inc. is the agent.

Barclays plans to price on the same date a similar note: 0% buffered Super Track digital notes due April 30, 2015 linked to the S&P 500 index. The three-year product will offer a digital return of 18.75% to 21.5% payable under the same conditions, which is the equivalent of a 6.25% to 7.16% annualized return.

The downside risk will be partially protected with a 15% buffer.

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