Agents sell $315 million, down 6.5%; strong appetite seen for MLP ETNs, leverage

By Emma Trincal

New York, July 14 - Issuance was weak in the wake of the Fourth of July weekend at $315 million, the bulk of it consisting of commodity exchange-traded notes and leveraged products, according to data compiled by Prospect News.

UBS was the top agent for the second week in a row with the inception of its leveraged exchange-traded access securities linked to the Alerian MLP Infrastructure index. This followed the upsizing of a similar issue but without the leverage the prior week.

UBS AG, Jersey Branch's $100 million of 2x leveraged long E-Tracs due July 9, 2040 linked to the Alerian MLP Infrastructure index were last week's No. 1 deal.

Fourth of July

Twenty-eight deals priced during the week ended Friday, half the number of the week before.

Volume declined by 6.5% from the $337 million recorded during the week preceding the holiday weekend.

Both weeks can be compared as they both featured mid-size ETNs in the $100 million range, according to Prospect News data.

Volume overall was not significantly weak when compared to equivalent weeks that followed the Fourth of July holiday in the past four years.

The volume last week was 1% of the $29.29 billion sold so far this year, slightly lower than the 1.45% average since 2006.

ETN-driven

But sources agreed that ETN issuance drove volume last week in this traditionally slow period of the year.

"ETNs are increasingly popular, and there's been a lot of inflows into that space," said Philippe Comer, managing director of commodity investor structuring at Barclays Capital.

Recent ETN issuance including last week did not come from Barclays Bank plc but from smaller competitors such as UBS, Credit Suisse AG, Nassau Branch and Deutsche Bank AG, London Branch.

"We created the ETN product. It's gaining popularity. It's been validated. It's something we're satisfied with," Comer said.

Commodity-linked ETNs

ETN issuance last week was rooted in commodities, a trend seen since May, according to data compiled by Prospect News.

At the end of May, UBS priced $100 million of its E-Tracs linked to the UBS Bloomberg Constant Maturity Commodity Index Total Return.

The following month, UBS priced $75 million of another ETN linked to the UBS Bloomberg CMCI Platinum Total Return.

During the week preceding last week, UBS upsized its E-Tracs offering linked to the Alerian MLP Infrastructure index.

Last week, UBS rolled out a leveraged version of this product while Credit Suisse priced another $6.74 million of 0% ETNs due April 20, 2020 linked to the Cushing 30 MLP index.

As a result of UBS' top deal, commodities represented more than a third of total issuance with $119 million sold in four deals, a proportion of the market equal to the previous week.

"Fears of currency debasing, appetite for diversification and inflation concerns, all these factors support the demand for commodities," a commodities structurer said.

Some market participants commenting on investors' appetite for commodities structures offered in an ETN format offered various explanations.

"When an underlying is tough to sell to retail, issuers package it into an ETN," said a New York sellsider.

Others said that the recently issued ETNs are more of a hybrid product.

"MLP ETNs are more like equity deals, similar to mining stocks deals for instance, than commodity deals," said Comer.

Single-stock decline

Traditional structured products purely linked to equities continued to decline last week, amounting to 44% of total issuance versus 53% the week before.

Sources debated the cause of this trend, some attributing it to the new inflows of ETNs mixing two asset classes - equity and commodities - and others seeing in it a sign of risk-aversion.

The trend was mostly driven by a decline in single-stock deals, which totaled only $10 million, or 3% of issuance, sold in eight reverse convertible transactions. This is down from 11% the week before.

"Reverse convertibles have a calendar cycle. They rarely price mid-month," the New York sellsider said.

"It's earnings season. You show the coupon early in the month; you collect at the end."

'Boring' S&P 500

On the other hand, investors had a greater appetitive for equity index-linked products, especially the S&P 500.

"Demand for indexes reflects the uncertainty. The market won't pick up until the end of August," the sellsider said.

"Those S&P deals hit the market once a month, and you have 10 firms competing for small margins," he noted.

"It's dictated by asset allocators in the private banks. It makes the U.S. market a little boring sometimes."

Equity index deals made for 41% of total issuance with $129 million in eight deals.

The largest among those - and the second-biggest one for the week - came from Deutsche Bank. This issuer sold $65.5 million of 0% return enhanced notes due Oct. 14, 2010 linked to the S&P 500 index. The payout at maturity will be par plus double any index gain, up to a maximum return of 9.9%. Investors will share in any losses. The deal was distributed by JPMorgan.

This large transaction illustrated another trend: the importance of leverage in a volatile environment. In particular, investors did not shy away from leveraged structures offering no downside protection, leading some sources to characterize retail investors as still bullish.

Popular leverage

Leveraged products were the second most popular structure after ETNs, amounting to $133 million, or 42% of total issuance. Within this category, investors bought $79 million of pure leveraged notes with no buffer, which represented 25% of the total volume.

"Since the market has significantly dropped, most investors tend to be bullish right now and comfortable with the downside risk of leveraged products," an equity structurer said.

"The volatility environment has been good for leverage products since the end of April," he added.

Using pure leverage could indicate a preference for high-risk and high-reward structures on the part of aggressively bullish investors, other sources said.

"Very bullish investors want to maximize leverage. They want no caps or high caps," the New York sellsider said.

Equity, currency mix

Currency deals remained weak but showed slight progress to 9% of the volume - $28 million in two deals - last week from 4% the week before.

But this result came almost entirely from one deal offered by Barclays in which the notes benefited from a dual exposure to foreign equity and currencies. Barclays' $26.58 million of 0% buffered return enhanced notes due Aug. 5, 2011 linked to a basket of Asian equity indexes and their related currencies was the third-largest transaction of the week. JPMorgan was the agent.

UBS was the top agent of the week with a third of the market share. JPMorgan followed with another third. Goldman Sachs was third with two deals for 11.55% of the total.

UBS is ranked No. 6 in the U.S. structured products market so far this year.

"ETNs are increasingly popular, and there's been a lot of inflows into that space." - Philippe Comer, managing director of commodity investor structuring at Barclays Capital

"The volatility environment has been good for leverage products since the end of April." - An equity structurer

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