Issuance picks up to $544 million as BMO enters U.S. market, new ETN on popular MLPs debuts

By Emma Trincal

New York, April 21 - Issuance rose in a week characterized by news events, including the appearance of a new issuer in the U.S. structured products market and the pricing of exchange-traded notes linked to a new master limited partnership index.

In the week ended April 16, $544 million of structured products priced in 84 deals, an increase of 12.3% from the week before, according to data compiled by Prospect News.

New dealer

Bank of Montreal made its first foray into the U.S. structured products market via BMO Capital Markets Corp., its North American broker-dealer arm.

The deal, the second-largest one for the week, priced at $50 million, a size sources said was significant for a first deal.

It was an offering of redeemable range accrual notes due April 28, 2020 based on the performance of Libor, according to an FWP filing with the Securities and Exchange Commission. Interest-rate-linked deals tend to be larger in size, sources noted.

The deal may have been bought by an institutional investor given its low fee of 0.1%, in line with institutional pricing.

"It's exciting in this resurging market to have a new issuer coming up with a strong structured product deal," said Beth Kleiman, previously managing director for exchange-traded products at NYSE Euronext.

Interest will accrue at the rate of 6% per year on each day that Libor is 6.5% or less and at the rate of 0.05% per year on each day that Libor is more than 6.5%. Interest is payable quarterly.

The payout at maturity will be par.

The notes are callable at par on any interest payment date.

Cushing ETN launch

Another event was the introduction of a new ETN offering linked to a new MLP index.

Credit Suisse, Nassau Branch priced $15 million of ETNs at the inception of its previously announced $1 billion overall issue of 0% ETNs due April 20, 2020 linked to the Cushing 30 MLP index.

The goal of the index is to track the performance of 30 companies that hold mid-stream energy infrastructure assets in North America.

The notes may pay a distribution on quarterly payment dates determined according to any cash distributions of the MLPs in the index.

This deal comes on the heels of JPMorgan Chase & Co.'s successful ETNs linked to the Alerian MLP index introduced last year.

Sources said there is a momentum around MLP deals and noted that UBS AG, Jersey Branch just rolled out its own version last month with ETNs linked to the Alerian MLP index.

The Cushing index was making its entrée as an underlying for an ETN.

Some sources said that notes linked to MLPs represent a brand new type of product and consider MLPs as a new asset class altogether. They predicted that the products will grow in popularity because they provide potential for both large income distributions and growth.

But a sellsider said, "MLPs are not a new asset class. MLP notes are very much the same thing as getting commodity exposure via equity. These things are equity structures linked to a commodity underlying. It's just another hybrid between commodity and equity."

Talking about the recently launched ETNs, this sellsider added, "JPMorgan has been very successful with Alerian, and they're just replicating it."

Equity popularity

Equity prevailed as has been the case so far this year.

Equity-linked deals represented $425 million of total volume, or 70% of the issuance.

Within this asset class, equity index-linked deals made for about two-thirds of the total issuance ($290 million) and single-stock deals were a little bit less than a third of the total ($135 million).

"Equity deals are plain vanilla structures, and people are more comfortable with it," said Kleiman.

"We had a couple of years marked by concerns about credit risk and complex derivatives. But people still need to put their money in play, and so issuers have gravitated toward plain vanilla deals that investors understand. Sometimes you see more indexes; sometimes stocks are more in favor. Everything is trending in this market."

Japan rising

The largest deal of the week was an equity-linked product.

Eksportfinans ASA priced $158.72 million of 0% equity index-linked notes due Oct. 26, 2011 linked to the Topix index via Goldman, Sachs & Co. The notes priced at 100.39.

The structure was simple, designed to give investors exposure to the Japanese equity market, sources said.

If the final level is greater than the initial level, the payout at maturity will be par plus the gain. Investors will share in any losses.

"Japan has been in a slump for a while. With this deal, Goldman is offering a turnaround play," said Kleiman.

The Topix has gained more than 6% this year, and the market is paying attention to the recent boom in Japanese exports fueled by a depreciated yen that has pushed Japanese stocks higher, experts said.

Commodities in reverse

Another trend was the rise of non-reverse convertible structures among single-stock deals.

As seen the week before, autocallable notes linked to one stock or other equity-linked types of deals have progressively been competing with reverse convertible offerings as the structure of choice for notes linked to a stock.

There were a total of about $72.5 million priced in five autocallable deals, among which three were done around single stocks such as General Electric Co. and Ford Motor Co.

While reverse convertible structures still prevail with $74.76 million priced in this category, they are coming under pressure, sources said.

Commodity-linked deals in their pure form - notes linked to the price of a commodity or to a commodity index - receded last week, amounting to only $36 million in five deals, according to data collected by Prospect News.

But market participants said that these figures can be misleading given that investors have appetite for commodity stock deals, in particular via a reverse convertible format.

In fact, half of the reverse convertible deals were tied to one commodity stock, according to Prospect News data.

One of them was the third-largest deal of the week: $29.25 million of 13% annualized Equity LinKed Securities due Oct. 15, 2010 linked to Consol Energy Inc. stock brought to market by Morgan Stanley.

The payout at maturity will be par of $10 unless Consol Energy stock falls by 20% or more during the life of the notes, in which case investors will receive a number of Consol Energy shares equal to $10 divided by the initial share price or, at the issuer's option, an equivalent amount in cash.

"People are looking for a hybrid exposure through both commodities and equities," the sellsider said.

"There is quite a big demand in commodities. I see that demand sustained. But people are increasingly getting exposure to commodities via stocks. Reverse convertibles appeal to investors. The structure is well accepted. And since direct exposure to commodities is still new and growing, buying commodities via a stock-linked product is an easier step.

"It may not be the best way, and you may be better off buying a note linked to the price of oil, for instance, or tied to a commodity index. But people feel comfortable with reverse convertible structures."

Simplicity may also be a factor.

"Most retail investors are not in a position to invest in futures and so they are looking for notes that will track a basket of commodity futures or indexes," said Kleiman. "But index providers have to establish rules about valuations and put in place index stipulations that fit the requirements of the regulators. It may be easier for both issuers and investors to tap into the asset class through an equity product."

"Payouts on reverse convertibles are usually pretty great. It's a big plus that makes reverse convertibles a popular play to gain access to commodities," she said.

No currencies

There were no currency deals during the week.

Rate-linked products amounted to $79 million, or about 13% of the total, priced in five deals.

The largest of those was done by Morgan Stanley, which priced $25 million of CMT and S&P 500 index-linked range accrual notes due April 15, 2025.

Goldman tops

Goldman Sachs topped the league table for the week, as it did the week before, with $217 million priced in four deals, totaling 35% of the volume.

It was followed by Morgan Stanley, which sold $92 million in four deals, representing 15% of the total. The third-largest agent was UBS with $71 million in nine deals.

"Issuers have gravitated toward plain vanilla deals that investors understand." - Beth Kleiman, previously managing director for exchange-traded products at NYSE Euronext

"People are increasingly getting exposure to commodities via stocks." - A sellsider

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