Issuance slows due to market selloff, holidays, but hybrid rate-linked products make comeback

By Emma Trincal

New York, Feb. 17 - Issuance slowed down last week, reflecting investors' hesitations in a changing market coupled with a shorter week ending with Presidents' Day weekend.

At the same time, sources noted a spike in interest rate-linked notes. The products, tied to a mix of rates and equity, suggest new ways for issuers to overcome low interest rates and challenging pricing, sources said.

Structured products desks in the United States sold a total of $243 million in 35 deals during the week ended Feb. 12, versus $382 million in 60 deals for the prior week, according to data compiled by Prospect News.

No deal exceeded $40 million in size, and there were no exchange-traded notes offerings.

Clients on the sidelines

"It was a big school holiday week. A lot of people were out, which makes issuance a little slow. I don't know if we've had deals canceled or if we just had fewer initiatives, but it's typical for holiday weeks to impact retail sales, so I wouldn't read too much into it," a New York sellsider said.

"I think we can also say that customers have been on the sidelines given the big selloff that we've had for three weeks. It may take a couple of weeks for issuance to pick up again," this sellsider added.

Top deal in currency

The largest deal came from Goldman, Sachs & Co., which priced on the behalf of Eksportfinans ASA $39.71 million of 0% currency-linked notes due Sept. 22, 2011 based on the bearish performance of the euro relative to the dollar.

The issuer priced $51.76 million of the notes on Feb. 5, which brings the total for this popular deal to $91.47 million.

Part of the success of this transaction is due to the sovereign debt crisis in Greece and Europe, which has led more and more investors to turn bearish on the euro and bullish on the dollar, sources noted.

The second-largest deal involved a more complex structure with an innovative index, the CBOE S&P 500 PutWrite index created in 2007. This benchmark was designed to track the performance of a so-called PUT strategy that overlays short put options on the S&P 500 index over a money market account.

JPMorgan Chase & Co. priced $27.5 million of 0% return notes due March 23, 2011 based on the CBOE S&P 500 PutWrite index.

Interest rates combo

None of the top deals represented any particular trend. But sources noticed that investors bid on products linked to interest rates or representing curve plays. Issuers priced approximately 23% of the total volume in interest-rate linked products or products tied to a mix of rates and equity.

Most of those transactions came from Morgan Stanley, typically No. 1 for those products. The bank priced $14 million of range accrual notes due Feb. 16, 2025 linked to six-month Libor and the S&P 500 index and $16 million of leveraged callable CMS curve-linked notes due Feb. 16, 2030.

On Wednesday, this issuer brought to market two other deals linked to a mix of rates and equity: It priced $10 million of CMS curve and Russell 2000 index-linked range accrual notes due Feb. 16, 2030 and another $10 million offering of range accrual notes due Feb. 16, 2025 linked to six-month Libor and the S&P 500 index.

Barclays Bank plc and Royal Bank of Canada also priced rate-linked deals but did so in much smaller sizes.

"I've noticed a couple of private rates deals that were purely interest rates. But what we've seen last week, I wouldn't call them rate deals. These are hybrid," said a rate structurer at a bank in New York.

"Because equity volatility is so much higher, they introduce an equity component so they can make more money. I don't see many pure interest rates play. Rates are so low, that's why it's not getting done."

This source said that "there is a lot of demand for rate deals" on the part of investors "but not at those levels."

Issuers as a result face the challenge of making those deals in a way that will appeal to investors, and bringing some equity into the mix may be part of the solution, this source said.

"By introducing hybrid deals with equity indexes, deals can be done cheaper. The investor is selling more optionality. There is higher risk for investors, which gives them higher coupons," this rate structurer said.

Volatility and pricing

The appeal of interest rates hybrid products may also result from the equity market decline seen in the last half of January and first week of February, the sellsider said.

"When the market makes a big move like that, what we've seen recently you see a corresponding spike in volatility. It means you can structure more attractively priced principal-at-risk deals because options prices are affected directly," the sellsider noted.

Goldman tops

Goldman Sachs was the No. 1 agent last week with $57 million sold in three deals for 23.27% of the volume. It replaced Barclays, which held the top slot the week before.

The second agent was Morgan Stanley with $52 million issued in five deals for 21.42% of the total, taking on the spot held by Goldman Sachs the week before.

JPMorgan, which was the top agent in the first week of the month, was the third last week with $43 million priced in eight deals for 17.86% of the volume.

Barclays was only fifth with $21 million sold in three deals for 8.63% of the market share.

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