Issuance slips; autocallables, ETNs dominate sales; Barclays maintains lead in league table

By Kenneth Lim

Boston, Feb. 23 - Structured product issuance dipped last week in a typical middle-of-the-month slowdown, with autocallables and exchange-traded notes forming the bulk of sales.

Issuers sold $422 million of structured notes in the week ended Feb. 18, according to initial data collected by Prospect News. For the year to date, total issuance stood at $10.1 billion, compared with the year-ago total of $9.4 billion.

Barclays remained the most prolific bookrunner in the year to date, with almost $4 billion of notes sold and a comfortable lead atop the league tables. Merrill Lynch was next with $1.73 billion, while JPMorgan was a close third with $1.67 billion.

Equities were the most popular underlying asset class, accounting for about $321 million of the week's volume. Commodities and currencies were the underlying assets for about $64 million of notes, although quite a number of underlying equities were commodity-related companies.

Autocallable and kick-out structures had a strong showing during the week, representing about $149 million of notes sold. ETNs, as usual, were also a main source of sales, with $99 million sold.

Autocallables in favor

Issuers offered a myriad of autocallable structures over the past week, capitalizing on increasing wariness about the two-year bull market in equities.

Autocallable structures are typically shorter-term products that offer a coupon that will be paid at maturity or early redemption. The notes will usually be called as long as the underlying closes above a certain level. Investors will typically participate in any downside if the underlying falls below a trigger level during the life of the notes.

"When you're not as bullish about the underlying, you look at autocallables," one financial adviser said. "You stand a chance of getting a pretty good yield as long as the underlying doesn't drop below a certain level. So all you want is for the underlying to not drop by much."

The adviser said investors will give up participating in any gains in the underlying that are above the coupon rate.

"So this isn't something you're going to buy when you're very bullish about the underlying stock or index," the adviser said.

One structurer said fund managers and high net worth clients have formed the bulk of buyers, noting that those investors are usually sophisticated enough to be comfortable with taking on downside exposure that can be similar to holding direct interests in the underlying.

"You do get a little bit of downside protection, but if that isn't enough you have the same exposure as holding the underlying stock or index directly," the structurer said.

The largest autocallable issue in the past week was UBS AG, London Branch's zero-coupon trigger autocallable optimization securities due Feb. 24, 2012 linked to the common stock of Halliburton Co.

Greater risk appetite

The popularity of autocallable structures linked to single stocks rather than indexes is also a reflection of an improved risk appetite among investors, the structurer said.

Investors who take on greater risk are doing so partly because risk-free interest rates remain depressed on a historical basis.

"People are getting impatient with the low returns that they're getting in bonds," the structurer said. "You can't retire on a 1% return."

Many other asset classes, such as equities and commodities, have also been doing well, and some investors want to take part in some of those gains.

"I think it's natural that they want to participate in some of these asset classes," the structurer said. "The nice thing about structured products is you can tailor the product to the exact kind of exposure that you want."

ETNs remain strong

The ETN market shows no signs of slowing down, the structurer added.

"ETNs are still a relatively new segment of the structured products universe in the U.S., but it has quickly become one of the most vibrant," the structurer said.

The single largest deal in the past week was JPMorgan Chase & Co.'s $95.2 million sale of ETNs linked to the Alerian MLP index of master limited partnership stocks.

The structurer said one of the biggest drivers of the ETN business has been the innovative indexing that has allowed ETNs to potentially replicate returns of managed funds or hedge fund-like strategies.

"Fundamentally, the structure of the ETN isn't very complicated," the structurer said. "And honestly, it shouldn't be because simple is oftentimes better. But we've seen amazing innovation in indexing from all the banks that are offering ETNs, and I think the industry as a whole has benefited from that."

The ETN business is also doing better now that investors are less concerned about the credit health of issuing banks.

"Without a doubt, the ETN business lives and dies by the issuer's creditworthiness," the structurer said. "After Lehman Brothers, counterparty risk has become easily the most important thing for many investors. Has the market managed to address that? I think the numbers speak for themselves."

"When you're not as bullish about the underlying, you look at autocallables." - A financial adviser

"You can't retire on a 1% return." - A structurer

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