Issuance volume slowing, but ETN, commodity sales continue unabated

By Emma Trincal

New York, Jan. 27 - Issuance last week was characterized by a slowdown in sales of non-exchange-traded notes products. But appetite for ETNs as well as commodity-linked notes was seen as picking up in momentum.

Issuance between Jan. 18 and Jan. 22 totaled $1.75 billion, according to data compiled by Prospect News at press time. ETNs accounted for $1.52 billion of this total, or 87% of the weekly volume.

Non-ETN deals amounted to $227 million only, a $200 million decrease from the week before.

The two ETN transactions came from Barclays Bank plc and Goldman Sachs Group, Inc.

Barclays priced $1.5 billion of its very popular iPath S&P 500 VIX Short-Term Futures exchange-traded notes due Jan. 30, 2019.

Far behind in size, Goldman Sachs priced an additional $20 million of its 0% notes due May 8, 2037 linked to the S&P GSCI Enhanced Commodity Index Total Return.

Less momentum

Traditional structured notes did not just decrease in volume compared to the prior week. Deal sizes were also smaller. Excluding ETNs, the average size was only $7.5 million versus $12.2 million during the prior week.

Bonus limbo

"I think most investment banks were on hold waiting for bonus announcements, so there is not much incentive to push the deals," said a New York sellsider. "If you're in the dark and don't know how much you're going to get paid, there is no reason to intensify the sales effort. First, you want to know if you want to stay where you are."

Hot commodities

Another trend was the overwhelming presence of notes linked to commodities, either via commodity stocks or more via commodity indexes, especially the Dow Jones - UBS Commodity index. Deals linked to commodity indexes or stocks represented approximately 75% of the total proceeds last week.

In addition, commodity deals were among the largest transactions.

For instance, Morgan Stanley priced $42.5 million of floating-rates notes linked to the Dow Jones - UBS Commodity Index Total Return due March 2, 2011 on behalf of AB Svensk Exportkredit.

Deutsche Bank AG, London Branch priced $25 million of market contribution securities due March 1, 2011tied to the Deutsche Bank Liquid Commodity Index - Optimal Yield Broad.

Some of the stocks used in the commodity-linked notes were natural gas producer Chesapeake Energy Corp. and mining company Freeport-McMoRan Copper & Gold Inc.

"Commodity issuance was enormous," the sellsider said. "It shows that people continue to play emerging markets, since buying commodities is just another way to express a bullish view on emerging markets. It's hard to resist the returns you can get on those markets."

"These large commodity deals reflect the concern for a potential massive inflation. Everything that protects you against inflation is selling very well in this environment," said a structurer also based in New York.

Goldman left behind

One source said Goldman's ETN sale last week was not a significant push of ETNs on the part of the bank.

As it was the case with the Barclays VIX ETN, Goldman's ETN linked to the S&P GSCI Enhanced Commodity index was an add-on only, not a new issue.

Goldman has now priced a total of $154.2 million of this ETN. The bank issued $57.4 million of the notes on May 8, 2007, upsized the issue to $64.2 million on June 5, 2007, to $84.2 million on Aug. 1, 2007 and to $134.2 million on Nov. 2, 2007, according to data compiled by Prospect News.

In comparison, Barclays has now priced $5 billion of its iPath S&P 500 VIX ETN, with last week's deal representing a $1.5 billion add-on.

The bank priced $250 million of the notes on Jan. 29, 2009, $250 million more on June 29, 2009, $1 billion on July 21, another $1 billion on Nov. 2 and $1 billion more on Jan. 4, according to data compiled by Prospect News.

"Goldman did an add-on last week, but it's really not significant because it's not a new issue and $20 million remains tremendously small," the structurer said. "Goldman has traditionally been underperforming in the ETN space. The top players are Barclays, Merrill, UBS and JPMorgan. I don't think Goldman has made the strategic decision of changing their business model. They don't seem to be jumping on the ETN bandwagon, and it is somewhat surprising. Assets under management for ETNs have been doubling or even tripling in the past six months. It is really exploding. I would have expected Goldman to be bigger than they are. Of the six big banks, they are really among the laggards."

Looking at the total issuance, Goldman last week was behind according to data compiled by Prospect News. As an agent, Goldman ranked fifth with only $27 million and 1.50% of the total.

JPMorgan occupied only the fourth slot with $44 million, or 2.42% of the market. Not surprisingly given the size of its ETN sale, Barclays was the No. 1 agent, dwarfing every other agent. Morgan Stanley was second with $88 million and 4.89% of the issuance, followed by Deutsche Bank, which scored higher due to a few popular commodity deals, taking on the third slot with 4.13% of the market.

"There was a time when every bank looked at ETNs," the structurer noted. "But when Lehman blew up, people became more hesitant. They realized that ETNs may not effectively compete with [exchange-traded funds] because you have the credit risk. The ETF size is a $725 billion market cap while ETNs represent only $9.3 billion. Everyone thought ETNs would be the new growth area for structured products, but the Lehman collapse made people realize that ETNs would never be part of the ETF world because of credit risk. People sort of lost interest in the excitement in ETNs. However, in the last six months, investors got comfortable with credit risk again, and the ETN market exploded. This is why I am somewhat surprised not to see Goldman being part of that."

This source said that the market capitalization for the Barclays VIX ETNs was $1.3 billion. The largest ETN is the iPath Dow Jones - UBS Commodity index ETN, with a $2.2 billion market capitalization.

Leveraged notes and volatility

In terms of preferred structures and putting aside the ETN deals, sources noticed an increase in leveraged notes, whether structured without principal protection or with only partial protection.

Agents sold $210 million of such deals last week, or 11.65% of the total. This type of structure won reverse convertibles, which accounted for only 2% of issuance.

"We're seeing a lot of leveraged notes," said the sellsider. "That's because people want to benefit from the high volatility short-term, and so they're buying products that deliver volatility within one year, sometimes 18 months."

Reverse convertible fatigue

This sellsider said that the appeal of leveraged notes may also reflect the desire from investors to move away from reverse convertible products as leveraged notes are often linked to indexes.

"Indexes are more transparent than stocks, and they are more liquid. It's easier for investors to track performance," said this sellsider.

"It's also an alternative to reverse convertibles almost always linked to one stock. Leveraged notes allow investors to play an entire sector instead of doing stock picking. Besides, issuers of reverse convertibles keep on using the same stocks over and over, and perhaps the market has become a little bit tired of it."

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