Structured products issuance expected to soar in 2007 despite recent market upset

By Sheri Kasprzak

New York, March 8 - Despite a major drop in the stock market in March, market sources say structured products issuance doesn't seem to be impacted that much and they fully expect an even stronger year than 2006.

"I'm not going to throw around any numbers because I'm not a fortune teller," said one market source when asked about his predictions for the year ahead. "So far, so good and I think business will remain strong. That [stock market] fall didn't hurt us one bit. Volatility is good for [structured products] for the most part."

That market source did acknowledge that investors may have suffered some losses on offerings without principal protection.

"I feel pretty confident saying that we'll do more [structured products] business than last year," said another market source. "We're already off to a good start."

A distributor said he doesn't feel that the market is slowing down at all.

"If anything, we're seeing more," he said when asked about the recent stock market troubles and how the structured products industry might be impacted. "I think that will be the case for the year. There will easily be more than in 2006."

For 2007 through Feb. 28, there were $7.17 billion of structured products offerings in the United States, including all types of underliers. Stock and equity index deals totaled $5.18 billion compared to $5.06 billion for the same period of 2006.

Principal-protected deals seen gaining

Even though reverse convertibles have been the most popular structure traditionally, principal-protected offerings may now be pulling more weight in the market because of the stock market drop.

"Investors are seeking out more principal-protected deals because they've seen how easy it is to lose their investment," said one equity structurer. "Principal protection has not been a big feature but I'm willing to bet you more and more of them will creep up because investors are going to be demanding it."

As for reverse convertibles, some structurers said coupons may be heading skyward because of the volatility sparked by that stock market dip.

"Volatility is way up and that means bigger coupons," said one market source. "Even if the market hadn't fallen the way it did, it seems to me that it's a trend [reverse convertibles] are heading to. Obviously it depends on the reference stock and it depends on a lot of things but coupons have been getting bigger in some areas, especially tech."

Another structurer said he feels coupons may be getting bigger in some areas but the market fall may push coupons up across the board.

"I think coupons are getting bigger everywhere," he said. "I don't think there's necessarily a trend towards bigger coupons but with the stock market all over the place, volatility is pushing coupons up."

BRIC deals popular

In the emerging markets portion of the market, BRIC offerings have remained strong even as other emerging markets currencies have given up their returns and have fallen off the structured products radar screen for the time being.

"In the past few days, EM currencies have certainly given back a good portion of recent gains but, for example, the BRIC basket remains stronger against the dollar than at the start of 2007," said one market source on a foreign exchange desk. "In addition, FX volatility is up, which partially offsets currency losses in those notes that are principal protected."

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