Natixis' $35 million CMS steepener notes signal issuer's further push in the U.S. market

By Emma Trincal

New York, Aug. 5 - Natixis is making its presence in the United States more visible with the recent pricing of its first steepener note, which was one of the largest steepeners this year, according to data compiled by Prospect News.

Natixis US Medium-Term Note Program LLC settled on Wednesday $35 million of callable capped CMS steepener notes due July 31, 2028 linked to the 30-year Constant Maturity Swap rate and the five-year CMS rate, according to a term sheet.

"This was our first Natixis CMS-linked U.S. MTN issued; the deal was extremely successful and ranks as one of the largest steepeners of 2013. We believe it is the largest foreign bank steepener issuance of the year," said Javier Blanco, Natixis executive director, interest rate derivatives, who is in charge of distribution for fixed income.

Fixed rate for two years

The interest rate is 10% for the first two years. Beginning July 31, 2015, the interest rate will be four times the spread of the 30-year CMS rate over the five-year CMS rate, subject to a minimum rate of zero and a maximum rate of 10% per year, according to the term sheet. Interest is payable quarterly.

The payout at maturity will be par.

Beginning July 31, 2014, the notes will be callable at par on any interest payment date.

The Natixis notes were not registered with the SEC as they were issued under the 3(a)(2) program exemption, which refers to a section of the 1933 Securities Act related to exemption rules.

"We are very pleased with the market's response to our issuance," Blanco said.

Only two deals linked to CMS rates were bigger in size than the Natixis steepener so far this year, according to data compiled by Prospect News. Prospect News data tracks SEC-registered deals only.

Both were brought to market by Goldman Sachs Group, Inc.

The top one was a $64 million offering of callable quarterly CMS spread notes due March 6, 2028 linked to the 30-year and five-year CMS spread. The other was a $37.2 million product due Jan. 23, 2028 linked to the same spread.

"Several factors contributed to the success of [our] deal," Blanco said.

"The first was the structure itself; we opted to have a fixed-rate condition for the first two years while most of our competitors had one year of fixed rate before having the floating condition."

There have been 16 CMS-related deals in the $20 million and bigger size issued so far this year, according to data compiled by Prospect News.

Among those 16 offerings, only two (one from JPMorgan and the other from Morgan Stanley) offered a structure with a two-year initial fixed interest payment period. All others had a one-year initial period.

The two notes with two years' worth of fixed coupon, however, were not pure rate products but hybrids in which the floating rate depended not just on CMS spreads but also on equity level conditions, the data showed.

New name

"The other contributing factor [to the success of our deal] was that we are a new name within structured notes in the U.S. Investors are demanding credit diversification and may be full on other issuers. This worked to our advantage as investors chose our deal in order to diversify their issuer exposure. We expect this trend to continue," Blanco said.

The note was not the first rate-linked offering Natixis issued in the United States, but it was its most visible one compared to more recent rate deals, which were more lightly structured, he explained.

"We are excited to be involved in the U.S. market," Blanco said.

"Our group, Natixis Wholesale Banking Americas ... of which the broker-dealer Natixis Securities Americas LLC is a part, has about 550 people in the U.S., mostly in New York. We also have a Houston office, which focuses on energy, and offices in Argentina, Brazil, Canada, Mexico and Peru.

"We currently have a Cross Asset Investment Solutions team which focuses primarily on equity and fixed-income-linked structures to meet investor needs.

"As the Natixis U.S. MTN program expands, we plan on adding FX and commodities-linked structures to our product offerings depending on investor demand for those asset classes.

"Our priority is to provide investors with customized products that meet their investment criteria while educating the U.S. investor on our credit and further developing the Natixis brand.

"We are seeing demand for our credit and products from a wide array of investors, from retail and high-net worth to institutional. All across the investor spectrum."

The notes (Cusip: 63873HKA1) priced July 26.

The fee was 3.5%.

Natixis Securities Americas LLC was the agent with Morgan Stanley & Co. LLC acting as dealer.

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