Month begins at $244 million; top deal in commodities; popularity of range accrual notes grows

By Emma Trincal

New York, Aug. 11 - Issuance was slow in the first week of the month, which is "business as usual," sources said.

A commodity index was the underlying for the top deal in excess of $50 million, and range accrual notes made a push in a trend seen over the past few weeks, according to data compiled by Prospect News. Autocallable and leveraged deals remained the top structures, however.

Normal cycle

"Issuance is lower, nothing surprising here given that it's the first week of the month," a sellsider said.

Agents sold $244 million in the week ended Friday, down 82% from the week before, and 31 deals priced versus 183 in the preceding week, according to data compiled by Prospect News.

As with the prior week, agents did not price any exchange-traded notes last week.

A lot of the products were structured or priced around the same goal: providing investors with income as the environment remains uncertain, sources noted.

Seeking income

Commenting on the week's issuance in general and the renewed interest in range accrual notes, a structurer said, "The story is one of seeking coupon as there is an incredible thirst for income."

Reflecting on the Federal Reserve Board's decision on Tuesday to begin buying Treasuries in an effort to solidify the economy and to keep rates unchanged, this structurer said, "With the Fed announcing more quantitative easing, you'll see rates even lower. Chasing yield will be a big theme this year."

Barclays' $56.01 million No. 1

The top deal was a commodity-linked note based on oil, a sector that has shown high levels of volatility since the oil spill began in April. In addition, the issuer used the popular autocallable structure.

Barclays Bank plc priced $56.01 million 0% quarterly review notes due Aug. 15, 2011 linked to the S&P GSCI Crude Oil Excess Return index.

The notes will be automatically called at par plus a call premium if the index closes at or above its initial level on Nov. 8, Feb. 7, 2011, May 6, 2011 or Aug. 8, 2011. The call premium will be equal to the index return, subject to a contingent minimum return that will grow incrementally from 2% for the first review date to 8% for the fourth review date and a maximum return of 6% to 24% that also increases incrementally on each review date.

If the notes are not called and the final index level has not declined by more than 15% from the initial level, the payout at maturity will be par. Otherwise, investors will lose 1.1765% for every 1% that the index declines beyond 15%.

"I think this was a good product," the sellsider said. "It's a short-term maturity on commodities, an asset class that has been on hold. You have appreciation potential on a one-year term and the possibility to redeem quarterly."

Range accrual style

Range accrual offerings made for nearly 13% of the total in three deals totaling $31 million, a level that is significant, sources said.

Besides the rapid expansion of range accrual notes, of interest was their use of equity as an underlying and not just rates or a combination of rates and equity, sources noted.

"You get a higher coupon if you're in the range," said a market participant in fixed-income structuring. "The issuer doesn't care about the structure as long as they get the funding they need."

"Range accruals sell volatility. With volatility high, selling a call gives you a good coupon," the sellsider said.

Equity-only

The top range accrual note offering was also the fourth-largest deal of the week. It used only the S&P 500 index as the underlying.

Morgan Stanley priced $22.5 million of callable notes with contingent coupon due Aug. 9, 2020 based on the performance of the S&P 500. The coupon is 6% for the first year. After that, if the index is above 70% of the initial index level on the applicable valuation date, the contingent coupon will be 6% in the second year, 6.5% in the third and fourth years, 7.5% in the fifth, sixth and seventh years and 9% thereafter. The payout at maturity will be par, and the notes are callable at par on any quarterly redemption date beginning Aug. 9, 2013.

Several deals have recently been built around a spread between two Constant Maturity Swap rates - the 30-year and the two-year CMS rates, for instance - in addition to the S&P 500. The coupon in those structures usually accrues for each day the difference between the two rates is at a certain level and the S&P 500 remains at or above a certain threshold.

"Morgan Stanley has done many range accruals mixing Libor or CMS with the S&P. Now other issuers like Barclays are doing it too," said the structurer.

"Range accruals on rates and equity are the norm. Combining two asset classes gives you a little bit less volatility," he said.

But this structurer said that it's more unusual to see the structure employed using only an equity index as Morgan Stanley did with the S&P 500.

A smaller range accrual deal was UBS AG, Jersey Branch's $7.68 million of callable contingent accrual notes due Aug. 6, 2025 based on the 30-year and two-year CMS rates and the S&P 500.

"Range accrual structures are about monetizing and harvesting volatility. It's just another way to play volatility, one that's more benign than reverse convertibles," the structurer said.

Less confidence

Overall market sentiment remained characterized by uncertainty, which fueled some deals designed for more risk-adverse investors, sources said.

"With the Fed's talk on the slow recovery, people realize that it's too soon to be bullish," the sellsider said. "Some companies like Google [Inc.] and Apple [Inc.] are great. But banks are not in such great shape. Revenues in trading, asset management are declining. People have mixed feelings about the recovery. No one really knows what direction the market is heading to," he said.

Morgan Stanley's range accrual deal, despite its equity index underlying, fits the low-risk profile, according to the structurer.

"It's a 10-year. It's principal-protected. It definitely targets the fixed-income crowd. That's not for your typical equity client," he said.

Top structures

Another sign of interest in less risk was the importance of leveraged deals with partial downside protection. Last week, $84 million of these notes were sold in 10 deals, or 34% of the total. It was a reverse from the week before when the majority of leveraged deals were sold without any buffer or full protection.

Deal size helped volume last week, especially with the top deals: seven deals of $10 million or more priced, with four of them greater than $20 million and one bigger than $50 million.

Autocallables represented the best-selling structure with $85 million sold in two deals for 35% of the volume.

The first one was Barclays' top deal linked to the S&P GSCI Crude Oil Excess Return index.

The second one was Deutsche Bank AG, London Branch's $29.03 million of 0% autocallable optimization securities with contingent protection due Aug. 12, 2011 linked to the common stock of JPMorgan Chase & Co. sold via UBS.

"JPMorgan is interesting right now. The stock went down this month. It's a good entry point at those levels," the sellsider said.

"We'll see very short-term reverse convertibles or autocallables on North American banks. That's my bet," he added.

Reverse convertibles were on hold, amounting to 3% of the total issuance versus 17% the week before.

"That's normal. It's the monthly cycle. People close those deals at the end of the month," the sellsider said.

JPMorgan tops

JPMorgan was the top agent. It sold the No. 1 offering - Barclays' $56.01 million commodity-linked product - and the second-largest deal, $33.61 million of buffered return enhanced notes due Aug. 29, 2011 linked to the S&P 500 and issued by Deutsche Bank. JPMorgan's market share was 42%.

UBS took the No. 2 slot with the sale of the third-largest deal - Deutsche Bank's $29.03 million of 0% autocallable optimization securities with contingent protection due Aug. 12, 2011 linked to the common stock of JPMorgan. This agent sold 17% of the total volume in three deals.

For the quarter, JPMorgan is second and UBS third. The top agent is Barclays.

Currency fiasco

Currencies continued to slide. HSBC USA Inc. priced the only currency deal for $1 million. It was linked to the Korean won, Indian rupee, Indonesian rupiah and Philippine peso.

"The European debacle has put a brake on euro-dollar deals," the sellsider said. "Emerging market currencies offer opportunities, but retail clients aren't familiar with it."

In addition to market issues, currency transactions also face structural roadblocks.

"We haven't seen currency deals. Those are often capital-protected and short-dated, which, with rates near zero, is hard to do," the structurer said.

Given that the top deal was an unusually large commodity-linked offering, this asset class surged to 23% of the volume in two deals versus 16% in 11 deals the week before. This sector has been gradually gaining in importance over the past two months.

Equity remained stable with 68% of the volume sold for $167 million in 25 deals.

"There is an incredible thirst for income." - A structurer

"No one really knows what direction the market is heading to." - A sellsider

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