Issuance doubles, with stock-linked deals spiking to half of volume

By Emma Trincal

New York, Sept. 22 - Stock deals dominated structured products issuance last week, and volume for all products excluding exchange-traded notes doubled from the week before, according to preliminary data from Prospect News.

Agents sold $521 million in 78 deals in the week ended Friday versus $262 million in 50 deals in the prior week. When taking into account Barclays Bank plc's pricing on Thursday of an additional $2.5 billion of iPath S&P 500 VIX Short-Term Futures ETNs due Jan. 30, 2019, total volume reached $3.02 billion.

Half in stocks

Issues linked to stocks accounted for half of the total sales proceeds when excluding the Barclays ETNs, with $260 million issued in 53 deals, or more than two deals out of three.

"Clients like the high yields associated with stock deals," a New York sellsider said. "These are deals that work until they don't. For now, they're working."

The largest stock-linked offering was Deutsche Bank AG, London Branch's $47.08 million of 0% autocallable optimization securities with contingent protection due Sept. 22, 2011 linked to the common stock of Anadarko Petroleum Corp.

Coming up next, UBS AG, London Branch priced the biggest reverse convertible deal with $34.04 million of 10.09% yield optimization notes with contingent protection due Sept. 20, 2011 linked to the common stock of Ford Motor Co.

Chasing yield

"Autocallable and reverse convertibles continue to sell well," the sellsider noted. "Single-stock deals fit very well the needs of financial advisers from a business model standpoint."

"People are looking for yield enhancement. They're willing to take more risk on stocks in order to get more than 1%," a structurer said.

He was referring to risk-free rates. The three-year Treasury currently yields 0.75% and the five-year 1.25%.

Agents sold $104 million of reverse convertibles, or 20% of the total volume excluding the iPath VIX deal, in 44 transactions, making this structure the most popular one in total issuance volume after ETNs. Autocallables represented 15% of the total ex-ETN volume with $80 million, and those deals were much bigger in average size than reverse convertibles as only four autocallable products priced.

The Deutsche Bank autocallable notes tied to Anadarko and the UBS reverse convertibles linked to Ford were the third- and fourth-largest offerings of the week, respectively. The largest deal was Barclays' iPath S&P 500 VIX ETNs, followed by a $62 million offering of leveraged callable CMS curve-linked notes due Sept. 22, 2025 issued and sold by Morgan Stanley. This structure offered principal protection and five times the spread of the 10-year Constant Maturity Swap rate over the two-year CMS rate, up to a maximum interest rate of 15%.

More and bigger

Another characteristic of the week was the increase in deal size - the average non-ETN size grew 28% to $6.28 million from $5.24 million. Agents sold 15 deals in excess of $10 million.

Equity index-linked deals, for instance, doubled in volume to $159 million from $81 million even though agents priced the same number of deals - 17 - during last week and the prior week.

In addition, the total number of deals priced last week increased by 56% over the previous week.

Interest for rates

Interest-rates transactions gained momentum last week with four deals totaling $86 million, or 16.5% of the volume. It was a switch compared to the prior week's pace, which saw only one deal sold for just $1 million. Besides Morgan Stanley's $62 million CMS deal, another large rate offering came from Citigroup Funding Inc., which priced $21.31 million of callable leveraged CMS spread notes due Sept. 17, 2030.

The coupon is 11.1% for the first year. After that, the rate is four times the spread of the 30-year CMS rate over the two-year CMS rate minus 25 basis points, up to a maximum of 11.1% per year in each interest period.

The structurer said that the appeal of interest-rates-linked notes had little to do with the current Federal Reserve Board easing policy.

"It's driven by the desire to find alternatives to cash. Portfolios are overweight cash by an order of magnitude of two to three times," he said.

"Investors are looking for their money to work and be safe. Interest-rate deals provide yield enhancement over cash."

But the structurer added that last week's renewed interest in rates products may not represent a significant trend for the retail market.

"Interest-rates deals don't trade on a calendar base. They're situational. You find people who want to do it and you do it. It's more institutional flow than retail," he said.

Commodities retreated compared to last week with only $16 million sold in three deals, or less than 1% of the total. In comparison, the preceding week had been marked by a strong surge in commodities issuance with four deals pricing in this category totaling $20 million, or 7.5% of the volume.

Far behind Barclays, which earned an 83% market share with its VIX ETN, the No. 2 agent was UBS with $164 million sold in 13 deals. It was followed by JPMorgan selling $102 million in 11 deals and by Morgan Stanley issuing two transactions totaling $70 million.

UBS was No. 1 the week before, followed by JPMorgan and Goldman Sachs.

"Clients like the high yields associated with stock deals." - A New York sellsider

"Investors are looking for their money to work and be safe. Interest-rate deals provide yield enhancement over cash." - A structurer

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