Barclays' market plus notes linked to WTI crude oil offer twin win to investors, adviser says

By Emma Trincal

New York, Aug. 15 - Barclays Bank plc's 0% market plus notes due Sept. 3, 2014 linked to WTI crude oil represent a "twin win" for investors who want exposure to crude oil, said Steven Foldes, president and chief executive of Foldes Financial Management LLC, noting that gains can be had from up and down markets as long as the price does not decline beyond a certain limit.

But a commodities broker, who is bearish on oil in the short term, said that the timing for the investment may not be the best as prices are still rich and uncertainty around interest rates and the U.S. equity markets is high.

If the price of WTI crude finishes at or above the 80% barrier level, the payout at maturity will be par plus the greater of the oil return and the 9.51% contingent minimum return. If the price finishes below the barrier, investors will be fully exposed to the decline, according to a 424B2 filing with the Securities and Exchange Commission.

Geopolitical turmoil

Foldes said that oil should rally as the crisis in the Middle East worsens.

"We own some WTI because we're concerned about the unrest in Egypt and the civil war in Syria as well as the issue with respect to Iran getting close to acquiring a nuclear capability. There will be some kind of action from Israel sooner or not at all. We think probably in the next 24 months," he said.

"We remember 1973-74 when we had a shortage of supplies and the long gas lines. When supplies get cut, prices will sky rocket."

At the end of December, Foldes bought two investments to get exposure to oil.

One was the PowerShares DB Oil exchange-traded fund, the other the iPath Pure Beta Crude Oil ETN.

"They've both been up nicely. The [iPath] Barclays is up 10% and the PowerShares, 5%," he said.

The notes offer a different payout than a simple long exposure to a fund.

Good structure

"I like the note. I like the fact that it's relatively short. The 20% barrier level is a nice protection, especially for a short period of time," Foldes said.

"If oil does go down, it has to go down by more than 20% in order for the investor to get knocked out. The 20% protection is not insignificant.

"The time period looks pretty good. You get the long-term capital gain treatment since it's more than a year by a few days. That's good.

"Also, the barrier is observed at maturity only, so price fluctuations during the term have no impact on the payout. That's also good."

Perhaps the most appealing aspect of the structure is the upside with the combination of a minimum return and unlimited gains, increasing the odds of generating high returns, he said.

Whether oil is down by less than 20% or up by less than 9.51%, investors will see their return bumped up to the 9.51% contingent minimum return, he said, which enables them to outperform the asset price.

If oil rallies even more than the 9.51% minimum, the noteholders will capture the gains.

"You get all the upside with no cap. That's pretty good," he said.

"It's a twin win. You can win if it goes up, and you can also make a nice return if it goes down as long as it closes above the barrier.

"While there's no leverage, you do have enhanced return in this structure.

"It's a very solid note, something that I will definitely investigate with Barclays. I wouldn't do this off the shelf. We never buy off the shelf. We customize our notes, and we do these things on a competitive basis.

"We'll have a conversation with Barclays and evaluate further to see if there is a way to get an even more favorable exposure. We may want to do this on a buffer instead of a barrier and maybe go slightly longer.

"We view oil as a two-year investment. You need enough time to allow the world to respond or not to the current geopolitical challenges."

The bear view

Others have a shorter time horizon and a less bullish outlook on oil. They are cautious about the Federal Reserve's next move in September, and they don't rule out a 20% decline within a year.

"We're bearish on oil at the moment, but our timeframe is much shorter," said Matthew Bradbard, vice president of managed futures and alternatives at RCM Asset Management.

"Oil is right now at $107. It would have to trade below $85 to drop 20%. It may not happen in a year, but the trend is not bullish right now. In fact, I see oil below $100 four or six weeks from now. I'm getting my guys to put on bearish trades at this time.

"We see many bullish drivers that should make crude price go up. But it hasn't happened.

"The Department of Energy reports that crude inventories decreased; oil is still not moving higher.

"The dollar is getting hit; we're not moving higher

"You have the turmoil in Egypt; oil is still not moving higher.

"You have a lot of bullish factors, and oil is still not moving."

For Bradbard, a year is a long time, especially when considering that many predict a correction in the stock market and the soon-to-end Fed's stimulus program.

"I would wait until the next Fed meeting in September 17-18. If the Fed starts raising interest rates or gives a hint at it, in theory that should mean a stronger dollar and oil could back off to $75 or $80. It could be below $85 then," he said.

"Also there is the stock market. We're due for a correction, not something drastic but definitely a 5% to 8% correction. We haven't had a correction since June. I don't think the market is going to collapse, but if it does, people will sell everything, and that could accentuate the downward trend in oil. As a result, I can see oil dropping below $90-$95. Whether it drops below $85 will depend a lot on how the market reacts to the Fed.

"I think if you're buying oil right now at $107-$105, you're buying way too high. The timing may not be best in my opinion."

The notes (Cusip: 06741TD53) will price on Friday and settle on Wednesday.

Barclays is the underwriter. JPMorgan Chase Bank, NA and J.P. Morgan Securities LLC are dealers.

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