Volume down 64% for the month as Greek default fears, banks' woes reignite credit concerns

By Emma Trincal

New York, Sept. 14 - Issuance of U.S. structured products dropped last week compared to the week before as well as for the month as the European debt crisis spilled into the financial sector and investors bailed out of risk in a volatile market, a sellsider said.

Holidays and the slow nature of the summer season were also driving forces behind the downturn, according to a structurer.

Agents sold $127 million in the four-day week ended Friday, a nearly 80% drop from $623 million sold during the week preceding Labor Day, according to data compiled by Prospect News, which excludes exchange-traded notes.

The market rallied on Tuesday and Wednesday then fell at the end of the week, ending flat.

However, the CBOE Volatility or "VIX" index, which measures implied volatility on S&P 500 options, swung up and down before peaking on Friday at 38, finishing up 4% for the week.

The VIX, also known as the "fear gauge," indicated that investors are pulling out of risky trades, the sellsider said.

Euro shock

Global credit pressures caused by the Greek debt crisis were mostly to blame, according to this sellsider.

"Some of the big players in structured products are European banks, and investors have become very focused again on credit," he said.

"It's visible especially with the French banks but also other European banks.

"Even Deutsche Bank, who has done the best around the last two months, has seen its stock losing half of its value since the end of April," he said.

As Greece is on the brink of a default, the contagion has spread to the U.S. financial sector, as seen in the recent sell-off of bank stocks.

Some banks with problems of their own - notably Bank of America Corp., struggling with its mortgage book - have seen their stock battered. The bank, whose stock has plunged 30% since the beginning of August, announced 30,000 layoffs this week.

But for the structurer, those cuts have nothing to do with the structured products business, which has remaining healthy despite the market downturn.

"It's obviously not a rosy picture for the banks," he said.

"But the Bank of America layoffs are more of a strategic realignment. It's not because the market is bad or because they're losing money. They just don't want to be the biggest bank anymore.

"The people I have been talking to [at Bank of America] are still there, so hopefully they're OK."

"I haven't seen any aggressive staff reduction in structured products, at least not more than in the rest of Wall Street," the sellsider said.

Even if structured products desks may not feel the full impact yet, clients are worrying about the next Lehman Brothers crisis, this sellsider added.

"Bank of America had to utilize external issuers more in the past few months," he said.

"I would argue that they're using third-party issuers for more than 50% of the issuance in their platform."

Year still up

On a year-to-date basis, however, the picture is much brighter, according to Prospect News data.

As of Aug. 10, agents have priced $30.74 billion in 4,584 deals since the beginning of the year versus $26.83 billion in 4.497 offerings during the same time in 2010, a 14.57% increase.

As of Sept. 14, agents have priced $48.53 billion in 4,947 deals this year, an increase of 14.59% over the $42.35 billion sold in 4,625 deals in the same period of 2010.

"To me, what's relevant is the volume on a year-to-year basis," the structurer said.

"We may be losing some ground and the year-to-date increase may have been higher earlier this year, but we're still up so far from last year and that's what counts."

He said that "it is difficult to draw conclusions from short-term trends even on a monthly basis" because "there is so much noise" right now in the market.

"Short term, yes, we may have a downturn trend and people are a little worried," he said.

"The last two months have been a little bit disappointing in terms of production.

"But people understand that the holidays have a lot to do with it and that the summer is always slower. I don't believe the industry is in panic mode."

Asset classes

All asset classes fell in volume this month to date in various degrees except currencies, which increased 47%. This category remains very limited in size, accounting for only 6% of the total.

Single stocks and commodities fell the most, down 79% and 72% respectively.

"Gold is still very popular, but commodities have suffered a lot," the sellsider said.

Equity continued to predominate, even if it declined both on a month-to-month and on a weekly basis.

A total of $230 million of equity-linked notes priced so far this month, or 73% of the total monthly volume, which is more than the yearly market share of 68%.

However, volume in this asset class dropped by 65% this month compared to August.

Single stocks have been hit the most, making for only 10.5% of the total this month versus 18.5% last month and 28% for the year to date.

Equity indexes were the leading asset class this month with $197 million, or 63% of the total.

"Investors are comfortable with single stocks at times of greater risk appetite, but right now the trend is risk-off," the sellsider said.

"They're relatively more conservative. They prefer betting on indexes."

The use of volatility as an underlying for deals has been one of the most popular stories in recent weeks, according to the sellsider.

"Volatility continues to be extremely popular as an asset class," he said.

In this category, UBS AG, London Branch launched 12 new ETracs linked to the daily performance of a particular index in the S&P 500 VIX Futures Index series. The products allow investors to take a long or short position on six specific VIX index futures contracts, from one to six months, according to the prospectus.

The ETracs, which are exchange-traded notes, are not included in last week's totals. But the bank priced $10 million of each of the 12 new series with plans to sell up to $100 million for each of these.

Total volume including ETNs last week was also lower. It fell 60% to $251 million from $626 million the week before.

Triggers and barriers

There were no specific structural trends seen last week, except that investors seemed attracted by so-called "trigger notes" or "jump securities."

Those structures are based on a downside barrier observable at any time during the life of the notes. If breached, the barrier leaves the investor exposed to full losses at maturity with in some cases a cap on the upside. If the trigger event does not occur, investors get a return based on the underlying index performance comprised between a minimum contingent return and the cap.

An example was the top deal of the week: Goldman Sachs Group, Inc.'s $40.84 million of 0% index-linked trigger notes due Sept. 26, 2012 linked to the S&P 500 index.

The trigger buffer is 80% of the initial level. The contingent minimum return is 13.5%, and the return is capped at 20%.

The decline of reverse convertible notes was confirmed both on a weekly basis - down 81% to $17 million - and a monthly basis - with $25 million sold, or 58% less than the same period last month. This category of products is down 11% from last year at $4.24 billion.

Deals have seen their size shrink so far this month.

In the first 10 days of August, agents sold 25 deals over $10 million against only three so far this month.

There were no deals over $50 million last week, but two priced during the prior week.

The second largest offering last week came from Morgan Stanley, which priced $27 million of contingent coupon range accrual notes due Sept. 14, 2026 linked to the S&P 500.

The coupon is 8% for the first year. Beginning Sept. 13, 2012, the interest rate will be 8% per year multiplied by the proportion of days on which the index closes at or above 880. The notes are fully principal-protected.

Goldman Sachs led the week in total sales excluding ETNs with $50 million, or 39% of the total.

It was followed by Morgan Stanley with $35 million and UBS with $12 million.

Goldman Sachs was also No. 1 last week and leads for the month as well.

"The people I have been talking to [at Bank of America] are still there, so hopefully they're OK." - A structurer

"Volatility continues to be extremely popular as an asset class." - A sellsider

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