One large currency deal, atypical single-stock structures dominate issuance

By Emma Trincal

New York, Jan. 20 - Issuance of U.S. structured products was robust last week, and currencies dominated the flow of new deals with Goldman, Sachs & Co. pricing $150 million of a currency-linked product, propelling itself ahead of its peers in the league tables.

U.S. agents priced $427 million in 35 deals last week, just about the same level as the week before if one excludes a $1 billion exchange-traded note that was issued in the first week of January by Barclays Bank plc.

During the week of Jan. 4 to Jan. 8, agents issued $462 million in 39 deals, excluding the $1 billion ETN.

The difference was that last week saw some larger deals than usual among the top five.

Korean won bonanza

On Friday, Goldman Sachs priced for Eksportfinans ASA about $150 million of 0% currency-linked notes due Feb. 28, 2011 linked to the Korean won in relation to three other currencies. Each currency - the dollar, the euro and the yen - represented a separate series for these very popular deals.

Currency deals accounted for 35% of the total issued volume of last week. Sources said it is hard to tell whether there is a new emerging currency trend in light of the recent dollar recovery, pointing to the unusually large size of Goldman's Korean won deals.

"It's odd to get that size because the Korean won doesn't get that much attention. But Goldman thinks outside the box. I would imagine - although it's pure speculation - that this deal is related to some sort of swap contract that they did trying to lay off risk off balance sheet. It's got to be institutional. That's a huge issuance for a currency of that stature," said a money manager and former index-linked notes structurer in London.

Atypical single-stock deals

Another characteristic of the week was the decent size of a few offerings of notes linked to a single stock that were not reverse convertible. Instead, some investors showed interest for more atypical and complex structurers.

Notes issued last week that were tied to one stock made for 35% of the total with $150 million in issuance through 17 deals. Typically, investors buying single stocks via a structured note tend to buy reverse convertible products, sources said.

"When people use reverse convertibles, they prefer a single stock rather than an index because they can get more yield," said a sellsider at an equity-linked desk in London.

But two of the top deals last week were atypical structures tied to one stock that did not fit the definition of reverse convertibles.

One came from Credit Suisse, Nassau Branch, which priced $30.77 million of 10% equity-linked notes linked to Ford Motor Co. due Jan. 22, 2011. The other originated from JPMorgan Chase & Co., which sold $32.77 million of 10% equity-linked notes tied to Symantec Corp. due Jan. 20, 2011.

The payout in these two similar structures is based on whether the final share price is lower or greater than a predefined percentage of the initial strike price.

"We are seeing some equity-linked deals with payout levels based on strike prices," said a New York structurer. "Perhaps clients are beginning to get tired of reverse convertibles and are looking for diversification in equity. Those new deals may suggest that issuers are trying to find slightly different formulas."

That is not to say that reverse convertibles are no longer popular. The second-largest deal in size was in the reverse convertible notes category. On Jan. 11, Citigroup Funding Inc. priced $49.37 million of 12% Equity LinKed Securities due July. 21, 2010 tied to the share price of Barrick Gold Corp.

Barclays, JPMorgan out

The third-largest deal was not a surprise as Goldman Sachs Group, Inc. came back to market with its very popular autocallable structure, pricing on Friday $33.45 million of 0% autocallable index-linked notes due Oct. 26, 2010 linked to the Russell 2000 index. This structure has already sold by the hundreds of millions since last year.

With $179 million brought to market, Goldman Sachs topped the league tables for agents last week contributing to 42% of the total volume in just four deals. It was followed by Citigroup with its one large reverse convertible deal (11.55%). Morgan Stanley held the third slot mostly due to a $30 million Constant Maturity Swap deal priced on Friday (11.41%). The surprise was to find JPMorgan only in the fourth position and Barclays missing the top four ranking.

Rates out of favor

Sources said that another characteristic of recent issuance, including last week, was the relatively modest presence of interest rate-linked deals. The exception last week was the Morgan Stanley leverage callable CMS curve-linked notes due Jan. 25, 2025. But in general, rates are a harder sell at this time, sources said.

"Rates are too low, it does not pay and there is not enough volatility," said the New York structurer. "Morgan Stanley has the advantage of having very favorable funding costs. They are the ones doing the biggest rates deal, the CMS spread and the range accrual notes based on Libor and the S&P [500 index]."

Another reason for the modest pace of rate-linked notes issuance, he added, is that the top players, which would have the capacity to bring those notes to market, do not find a significant interest among their clients.

"Goldman doesn't do much retail, and institutional investors prefer equity," the New York structurer said.

Even for Barclays, which he said is centered on retail clients, finding clients who want to buy rates-linked products is not easy.

"Retail investors prefer to buy equity and commodities," this New York sellsider said. "Unlike commodities that require you to use options, you can easily access rate products via cash, corporates or Treasuries. So why would you buy complicated rate-linked products when you can simply buy bonds? It makes more sense for the retail guy to look for equity and commodity than for rates when they buy structured products."

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