SunTrust to jump into the fray as issuer of principal-at-risk structured notes

By Emma Trincal

New York, March 4 – SunTrust Banks, Inc. will broaden its structured investment issuing program by including principal-at-risk notes in equity, commodity and currency assets, according to several 424B2 filings with the Securities and Exchange Commission.

In the four product supplements filed with the SEC on Thursday, SunTrust said that it will offer and sell from time to time contingent coupon notes, participation notes and index-linked notes. The underliers may comprise one or several indexes, exchange-traded funds or baskets.

The product supplements describe terms that will apply generally to the notes. No specific deal has been announced at this time.

SunTrust Robinson Humphrey, Inc. is the agent.

So far, SunTrust has focused on principal-protected products, including market-linked certificates of deposit as well as floating-rate notes or fixed-to-floater notes based on Libor, according to sources and data compiled by Prospect News.

Funding

A debut in the riskier space of structured notes is a sign that the issuer is pushing in a new direction to raise funds, a sellsider said.

“There has been a lot of shakeup in the mortgage business, in the muni business. A lot of firms are struggling,” he said.

“Certain banks are looking to be issuers [of structured notes]. In the past few years, banks didn’t need the funding, but with rates going up, they’re starting to look for cheaper funding. It may be the right opportunity.”

Distributors are increasingly moving into riskier products, he said.

“The top five distributors are showing a lot of riskier equity-linked stuff, dual directional, worst of and so on. There’s a lot of contingency out there. Risk is picking up.”

The market has improved in the past month, he noted, pointing to the recent equity rally – the S&P 500 index has gained 4.5% in the past month – as well as the rise in the 10-year Treasury yield and the tightening of banks’ credit default swap spreads.

SunTrust’s ratings may also be advantageous. The issuer is rated BBB+ by Standard & Poor’s and A- by Fitch Ratings.

“People are trying to put out risky structures, but a lot of deals don’t look very attractive. Issuers are struggling and stretching for yield. The market has been very slow in new issues,” this sellsider said.

Too many issuers

But some market participants are concerned about an increasingly crowded space for issuers of structured notes.

“Here it comes, another issuer! And that’s a triple-B. Meanwhile, the pie is getting smaller,” a distributor said.

SunTrust Robinson Humphrey has so far sold “small” offerings in the $1 million to $2 million range, he said.

But the filings indicate that the issuer wants to expand its activity via external distribution channels.

“It’s a guess, but they probably finally got the approval to distribute externally. Now they’re going to jump into a small pool. They’ll be looking for the big guys, the JPMorgan private bank. ‘We’re triple-B: look at how attractive our terms are!’”

For this distributor, it’s in banks’ best interest to issue more structured notes, but distribution is not growing accordingly. In fact, it is “shrinking.”

“Every treasury needs money. They can issue billions if they want to use external channels,” he said.

“For an issuer, structured products are an attractive option compared to the benchmark deals.

“It raises funds for treasury. It increases the P&L for the desk. It provides liquidity for the derivatives.

“It’s a very attractive business from the issuance standpoint.

“Meanwhile, we have fewer distributors. This space is shrinking while more issuers are entering the market.

“It has come to saturation point.”

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