Structured products issuance drops at month-end as investors exit equities, broad indexes

By Emma Trincal

New York, April 6 - The last week of March saw structured products issuance volume drop by more than 50% with investors exiting equities as well as the broad indexes in favor of sector-specific picks, according to preliminary data compiled by Prospect News.

Agents sold $764 million in 208 deals last week, down 54% from $1.67 billion sold in 129 transactions during the week before, excluding exchange-traded notes offerings.

On a year-to-date basis though, this year's issuance is well ahead of last year, with $26 billion sold as of last week versus $19.3 billion last year during the same time.

Still, last week's figures were atypical for the final week of a month, which in general is the most productive one, sources noted.

Risk-averse sentiment

Equity in particular, as a percentage of total volume, fell to 60% from 71.5%.

"Anytime there's more risk, people will withdraw from equity," a New York sellsider said.

"Investors' sentiment has changed. There is more uncertainty. The global economic scenario with the unrest in the Middle East has led investors to pull back from risky assets."

Leverage down

And yet, the market rallied last week with the S&P 500 hitting new highs not seen since February. Volatility declined as well by 10% as measured by the CBOE Volatility Index or VIX.

Based on that, some sources found it surprising to note the strong decline of leverage last week, especially leveraged deals without protection, which have been in favor recently as volatility was on the decline.

Leveraged deals with no buffers fell to $20 million, or 2.56% of the market, last week from $557 million, or 33.34%, during the preceding week.

"Things are not always logical. Yes with less volatility, you should see more leverage. But it takes time before a trend translates into a product," the sellsider said.

"Say that the VIX is high when you're pricing something today and then volatility falls. It will take time before it translates into pricing products. As a desk, you have to turn around the product; you have to turn around the salesforce; it takes time. There is a lag."

Exiting the benchmarks

Equity indexes saw a strong decline, down to $136 million last week from $765 million the week before, which was a drop to 18% from 46% of the total, according to data compiled by Prospect News.

At the same time, investors demonstrated more interest in smaller indexes or sector-specific plays.

A structurer said that the Japanese crisis may have contributed to this trend.

"We've seen a rally in the equity market over the past couple of weeks following the crisis in Japan. I think Japan has led investors to differentiate between different industries," he said.

"Investors have become more selective about what type of segment in the market they want to invest in.

"They may be more cautious about some energy companies. They may be more bullish about manufacturing companies involved in reconstruction.

"That may explain the decline of interest in broad equity indexes. There's a greater focus on specific companies and specific industries," he said.

Commodity-specific bets

Seeking more specialized bets was especially notable in the commodities space. Among the top six deals, agents sold three commodities-linked notes each of which was linked to a particular commodity sector.

JPMorgan Chase & Co. brought the top deal in the ETN space with an additional $95.18 million add-on to ETNs due May 24, 2024 tied to the volume-weighted average price level of the Alerian MLP index. The underlying index is a sub-set of the energy space, which has grown in popularity for its potentially high income distributions.

Another example of a sector-specific play in the commodity space and the fourth deal for the week was Deutsche Bank AG, London Branch's $32.02 million of 0% capped knock-out notes due April 13, 2012 linked to the price of palladium.

In addition, Barclays Bank plc priced $25 million iPath exchange-traded notes due Oct. 22, 2037 linked to the Dow Jones - UBS Agriculture Subindex Total Return.

"As commodities have become more prevalent in investors' portfolios, investors have also become more selective. They're looking to diversify and hedge their portfolios by being more sector-oriented," said the structurer.

"While this trend has always existed in equities, it's something new with commodities. As the commodities market is maturing, people know more about commodities in greater detail."

For the sellsider, the bid for commodity-specific sectors reflects the appetite for risk of commodity investors in general.

"People are willing to take more risk for better returns. It's also part of the diversification story," he said.

"People went from S&P 500 into more specific equity indexes like the Russell or maybe the Dow Jones. Then they realized they had to diversify into other asset classes, such as commodities."

Inflation hedges

Interest rates deals were popular last week compared to prior weeks. Agents priced $83 million, or 11% of total volume, in this asset class, versus $21 million, or 1.2%, the week before.

This category does not take into account fixed-to-floaters and capped floater deals.

Citigroup Funding Inc. priced the top interest rate deal of the week and the second in size with its $69.49 million of callable step-up range accrual notes due April 1, 2026 linked to the S&P 500 index and Libor. After the fifth year, the interest rate would grow in proportion of the number of days on which the S&P 500 closes at or above 900 and Libor is 6.5% or less.

The sixth largest offering was Barclays' $25 million of fixed-rate callable range accrual notes due April 8, 2026 also linked to six-month Libor and the S&P 500 index.

Finally, Wells Fargo & Co. and Morgan Stanley each offered fixed-to-floating notes tied to the Consumer Price Index for $25 million and $22 million, respectively.

"Investors are beginning to pay attention to inflation. That's why you see more CPI-linked deals," the structurer said.

Paul Mortimer-Lee, global head of market economics at BNP Paribas in its April Global Outlook "Struggling with Inflation" said that: ""We saw a considerable pick-up in global inflation from 1.8% in 2009 to 3.5% in 2010." He predicted that inflation will rise further in 2011 to 4.4%.

For several sources, the risk of inflation has become more concrete this year.

"Last year, there was a lot of talk about inflation. Today investors are actually taking steps against it, shifting toward inflation-hedge products," said the sellsider.

UBS tops for week

The top agent last week was UBS. It priced $253 million in 29 deals, or 28% of the market.

UBS was the lead agent for the top stock deal of the week, JPMorgan Chase & Co.'s $34.92 million of 0% trigger autocallable optimization securities due April 5, 2012 linked to Apple Inc. shares. It was the No. 3 offering in size.

JPMorgan was the second agent with $185 million sold in 36 deals for 20.5% of the volume.

Barclays, at No. 3, sold 33 deals totaling $132 million, which represented 14.5% of the total market.

The week before, Merrill Lynch led the pack followed by Barclays and Citigroup.

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