Barclays' jump securities tied to S&P GSCI Grains index to gain value if priced amid sell-off

By Emma Trincal

New York, March 6 - Barclays Bank plc's 0% jump securities due Oct. 3, 2013 linked to the S&P GSCI Grains Index Excess Return offer an attractive upside for mildly bullish investors. The timing of the trade will be key, especially if the market sell-off gains momentum, sources said.

If the index return is positive, the payout at maturity will be par plus the upside payment of 26% to 30%, with the exact upside payment to be set at pricing, according to an FWP filing with the Securities and Exchange Commission.

Investors will share in any losses.

Risk off coming up

Matthew Bradbard, branch manager and managed futures specialist at RCM Asset Management, said that despite a price decrease, the index could go further down in the near term.

"Perhaps it makes sense to make a mildly bullish bet for a one-year, two-year term, and that's what the note does. But right now, I see the underlying under more pressure with the risk off trade," he said.

The S&P GSCI Grains Index Excess Return is a subindex of the S&P GSCI Excess Return index, the widely used commodities benchmark.

As of Feb. 27, the weightings for the underlying commodities of the S&P GSCI Grains index were 43% for corn, 34% for wheat and 23% for soybeans, according to the prospectus.

"During the risk on, everything has been piling in commodities and equity," Bradbard said.

"I think we're starting to see a sell-off. That's why I would short this index right now.

"As we speak [Tuesday afternoon], the S&P 500 is down 2%, oil is down 1½%, gold is down 1¾%, silver is down 2.5%."

The Dow Jones industrial average lost 200 points on Tuesday, the first decline of this magnitude since November.

The S&P 500 fell 1.5% to 1,343.

"I would expect a correction in the next few weeks, and I would expect all markets to be correlated, which includes agriculture," Bradbard said.

The notes are expected to price March 29 and settle April 3, according to the prospectus.

"In two weeks, if we have this correction by then, this deal could be a good buy," said Bradbard.

"I'd rather have any investment in agriculture versus stocks and Treasuries."

Asked why, he said that agricultural commodities will be more resilient given the growing population and global demand for food coming into the market.

"Besides, we've already seen just about a 20% decline in agriculture in the last year. Soybeans, corn and wheat have all fallen by 20% give or take," he said.

As of March 1, the index is down nearly 18% from a year ago. In that time, it has fallen to 42.52474 from 51.74310.

Frederick Wright, partner and chief investment officer at Smith & Howard Wealth Management, agreed.

"I like the fact that the index is down since last year. You always want to buy on the cheap," he said.

"The upside is attractive. I buy digital notes for the enhanced return they provide."

He said that even if the index increases by only 1% at maturity, investors will get a return of 26% to 30%.

"This is a note that will outperform in a mildly bullish environment," he noted.

Not for everyone

However, Wright was cautious regarding the risk and the choice of the reference asset.

"It's a small field of expertise, commodities, specifically grains. It's so specific that the normal investment guy like me may be shy in getting involved in it," he said.

"To have a modestly bullish outlook on these particular sectors - wheat, soybeans and corn - requires a pretty specific skill set.

"The index may be down and maybe those commodities are on sale, but if they were up a lot more before, maybe they're not as much on sale. It's one thing to keep in mind," he said.

The notes, he added, did not fit into the characteristics of his portfolio, which follows a conservative investment style.

"I don't think it would be right for us because we never buy a note that has no downside protection," he said.

"We're always looking for a maximum downside protection even knowing that it's hard to come by in days of extremely low interest rates.

"If the index was broader, perhaps even if it included all agricultural commodities, I may be a little bit more comfortable. But grain investing is very special.

"Most [registered investment advisers] or even brokers wouldn't have a lot of clients that would be looking for this.

"That type of underlying makes this product more appropriate for an institutional investor rather than an RIA."

Barclays Capital Inc. is the agent with Morgan Stanley Smith Barney LLC as distributor.

The Cusip number is 06741L294.

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