Structured products volume slows to $377 million; $67 million commodities offering eyed

By Emma Trincal

New York, Feb. 25 – Agents sold $377 million in the shorter week following the Presidents Day weekend, or nearly half the volume seen the week before, according to data compiled by Prospect News.

Only nine deals in excess of $10 million priced, with the top one for $67 million tied to a newly created proprietary commodities index. Also notable, agents priced five more deals linked to a popular non-U.S. equity basket, which has been used repeatedly since mid-January, including in a half a billion dollar transaction last month.

Issuance is up 10% this month as of Feb. 20 with $1.42 billion brought to market versus $1.29 billion for the same period last month, according to the data.

This trend however may reverse at the end of the month since unusually large deals priced at the end of January.

Those big deals have already pushed up volume year to date by14% this year, with sales amounting to $6.48 billion versus $5.69 billion last year.

New proprietary index

The top deal to price last week brought sources’ attention on commodities and the popularity of proprietary indexes.

Citigroup Inc. priced $67 million of securities due April 1, 2016 linked to the Citi Commodity Spread Index–Bloomberg Commodity Index 3 Month Forward Sub-Indices versus Bloomberg Commodity Index Sub-Indices, a new index launched on Feb. 12.

This index tracks the difference between the aggregate performance of the three-month forward versions of the single-commodity sub-indexes for each of the commodities included in the Bloomberg Commodity index and (ii) the aggregate performance of the standard, non-forward versions of the same single-commodity sub-indexes, according to the prospectus. The notes offered a Libor-based coupon and three-times the index return. Citigroup Global Markets Inc. was the underwriter.

“We’ve seen starting last year a huge growth in the prop index space,” a market participant said.

“Issuers put an index-embedded in a structured product, usually a formulaic index. S&P or the issuers themselves out of the capital market group generate those indexes. Often it’s a delta one structure but not always. It went from impossible to sell a year or 18 months ago to very popular.”

Unpopular asset class

Given the size of the deal, some wondered whether commodities may be about to rebound and attract structured notes investors.

So far, commodities remain one of the most unpopular asset classes accounting for less than 3.5% of the year-to-date volume, slightly the same as last year.

“It may be a big deal sold to their wealth management or to an asset manager. But I don’t see much interest in commodities at the moment,” a sellsider said.

“The more the dollar appreciates, the more commodity prices will drop. There is an inverse relationship between the two asset classes.”

While the dollar impact plays a role for most commodities, interest rates also have an impact on certain sub-indexes.

“Take gold. Rates in the U.S. have been moving up this year. The 10-year is now yielding 2%. With inflation around 1.6%-1.7% and the headline inflation with oil probably lower, people tend to hold Treasuries instead of gold. Why would they buy gold today as it produces no yield and as it generates storage and insurance costs?”

An analyst said that it may be too soon to see increased demand for deals tied to broad-based commodities indexes like the one priced by Citi last week. But some sectors, like oil, could be the exception.

“We believe that commodities are weak due to China, which is a massive importer. There is an overhang in many places,” he said.

“Also we had a long-lasting speculative bubble in commodities. It takes a while for this market to recover.”

The commodities bear market began in July 2008 and lasted until mid-2009. Since then, commodities trended flat before crashing again since June of last year, he noted.

“We see a rebound for the second half of this year, but mostly in oil. We may have a broader commodity rebound but really the focus will be on oil,” he said.

Best-selling basket

Despite the popularity of U.S. markets, some investors are looking to diversify their holdings into non-U.S. equity assets.

This trend was visible last week in the pricing of five deals using a popular equity basket, which has been seen repeatedly this year. The particular basket always shows the same weightings and has been employed 21 times since Jan. 13 for a notional of $870 million.

Barclays Bank plc used it in Jan. 30 for the pricing of a $547 million offering distributed by JPMorgan. The second in size was priced by Goldman Sachs in an $80 million transaction a week before, and the next day, Barclays did $37.5 million of it.

The agents, which have used this basket so far this year include Goldman Sachs (eight deals); Barclays (seven deals); JPMorgan (two deals); and Credit Suisse and Royal Bank of Canada, which each priced a deal.

The basket consists of the Euro Stoxx 50 index with a 37% weight, the FTSE 100 index with a 23% weight, the Topix index with a 23% weight, the Swiss Market index with a 9% weight and the S&P/ASX 200 index with an 8% weight.

Goldman Sachs Group, Inc. last week priced $22,435,000 tied to this basket. The two-year notes offered par plus two times the basket return capped at 37% with no downside protection.

All the deals on this basket are leveraged notes, mostly capped. In most case, they are not buffered.

Investors are growing cautious about the all-time gains recorded by the U.S. stock market, which is about to start its sixth year bull trend, some sources said.

This would explain the appeal of a basket with a heavy weighting in the euro zone market and other non-U.S. regions, including the U.K., Japan, Switzerland and Canada.

Last week U.S. equity benchmarks advanced for a third consecutive week closing again at new record highs.

Autocallable reverse convertibles remained popular, making for about a quarter of last week’s volume, according to the data.

“I see more of those coupon notes than leveraged notes,” the sellsider said.

The top deal of this kind and the second in size was Morgan Stanley’s $24.75 million two-year contingent income autocallable securities linked to Seadrill Ltd. with a contingent payment of 17.2%.

“We’ve seen starting last year a huge growth in the prop index space.” – A market participant commenting on the use of proprietary indexes

“We see a rebound for the second half of this year, but mostly in oil. We may have a broader commodity rebound but really the focus will be on oil.” – An analyst

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