Barclays and Natixis Offer Investors a Chance to Get 10% or 11% Annually

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Author: Ari Socolow on April 22, 2014

I am a big proponent of keeping money that you absolutely cannot afford to lose in savings and CD accounts and is the best place to find and identify the appropriate online and local accounts for your needs. It makes sense in the current interest rate environment for investors to look carefully at placing very small amounts of their cash that they want to be sure is secure, but do not need to access for a long period in bank-issued Structured Notes in order to avail themselves of the opportunity to earn higher rates over time. While we have seen such Notes in the past offered by the likes of Morgan Stanley, Citibank, Chase, Goldman and HSBC, the offerings currently in syndication are offered by Barclays Bank PLC, the British bank rated A-/A3, and Natixis, the French bank rated A/A2.

The Note currently in syndication by Barclays Bank PLC is a 15 year Note paying 10% for the first year and then as much as 10% in subsequent years (on quarterly payment dates) based on the difference between the 30 year less the 5 year Constant Maturity Swap (CMS) rate. The Note is the same structure as an HSBC Note that I wrote about here and to a Citibank Note discussed here. Unlike those notes, this one is using a multiplier of 5 that offers a higher likelihood of getting closer to 10% (the 30 year CMS needs to stay only 2% above the 5 year on quarterly measurement dates for payment to 10%). The Note is callable after the first year and on each quarterly payment date, which is a feature that is unattractive, but does not jeopardize the 10% that this Note produces during the first year. Those interested in this Note can learn more about it by referencing CUSIP 06741UBK9 or ISIN No. US06741UBK97.

A Natixis Note in syndication is a 20 year Note that pays 11% for the first year and then as much as 11% in subsequent years (on quarterly payment dates) based on the difference between the 30 year less the 2 year CMS rate (the multiplier is 4). The Note does not pay on quarterly measurement dates if the S&P 500 trades more than 25% below its price on closing, and is not callable. This Note is similar in structure to a JP Morgan Chase Note that I wrote about last Fall. The main difference from the JP Morgan Note is that it is 20 years, instead of 15. Those interested in this Note can learn more about it by referencing CUSIP 63873HKC7or ISIN No. US63873HKC78

The Natixis Note is more interesting than the Barclays Note for several reasons – it is not callable, is based on the 30-2 spread instead of the 30-5 spread, may pay a higher interest rate (has a higher cap), and is issued by a credit that is currently rated to be slightly stronger. Nonetheless, I have had a tough time getting my hands around this one for two reasons. First, while 15 years is already certainly pressing the length of time for which anyone should lock up their money in an illiquid investment, 20 years is just much too long. Second, I find the S&P contingency something that is different to stomach, especially as the S&P could easily fall more than 25% and stay down there for a lengthy period of time. I therefore personally bought a small stake in the Barclays Note, but avoided the Natixis one.

Structured Notes are interesting ways to pick up yield, but investors should always take a very measured approach. Both of these Notes are illiquid and involve real interest rate risk, and could very well wind up paying little or no interest for lengthy periods of time.

Ari Socolow
Ari Socolow: Ari Socolow is the Chief Economist and Editor-in-Chief at BestCashCow. He is particularly interested in issues relating to bank transparency and the climate crisis. Since co-founding BestCashCow in 2005, Ari has been frequently cited in the media as an expert on local and national savings accounts, CD products, mortgage and loan products and credit card rewards products.

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