Issuance volume increases; fewer and bigger deals seen; commodities, reverse convertibles return

By Emma Trincal

New York, June 16 - Structured products issuance picked up in volume last week to $272 million, up 8.4% from the previous week, according to data compiled by Prospect News. But market participants noted that the quality and the fact that deals were bigger across all structures were more significant.

A second trend was the strengthening of commodity-linked issuance and a return in popularity of reverse convertibles compared to the prior week, the two developments being somewhat interconnected as the biggest reverse convertible offerings were tied to commodity stocks.

Finally leveraged structures pulled back noticeably.

More volume, bigger deals

With $27.5 billion issued in the 23 weeks leading up to Friday, last week's volume, while slightly better than what was seen during the prior week, remained frail, according to Prospect News' data.

However agents were able to sell larger deals. Thirty-five offerings priced during the week ended Friday versus 63 the week before.

The reduced number of deals combined with more volume led to an increase of the average size of deals to $7.7 million from $3.98 million a week before. Such an increase prevailed for most structures including reverse convertibles, whose size had been on the decline over the past few weeks when volatility hit new highs.

A New York structurer said that the bigger size of deals was a result of investors making fewer requests for customized deals - a phenomenon known as reverse inquiry - and the desks having grown more confident to sell their own offerings.

"You probably had more successful marketing by the dealers and less reverse inquiries," the structurer said.

"When investors go to the dealer requesting a specific product, deals are smaller. Dealers were probably able to go and pitch their deals. It's the successful marketing of dealer-driven theme-based ideas versus reverse inquiries."

Quality deals

But what caught the market's attention was the quality of some of the top deals.

"Dealers have grabbed the combination of very high volatility with wider spreads," said Jakob Bronebakk, associate partner with Jubilee Financial Products LLP. "They caught the wave. They sold better products."

Very few market participants showed concern about the relatively weak volume attributed to the cyclicality of the month, although those volumes remain weaker than similar early parts of the month when looking back at months prior to June this year, according to data compiled by Prospect News.

More relevant was the time of the year, sources said.

"Memorial Day weekend is the start of the U.S. slow season," said Bronebakk. "The senior guys go and leave the juniors on the desk. Issuance should continue to slow in July and August."

Even when taking into account the fact that the top deal of the week was a $75 million exchange-traded note, offerings remained larger in average size at $5.79 million.

UBS AG, Jersey Branch priced an additional $75 million of 0% exchange-traded access securities (E-Tracs) due May 14, 2018 linked to the UBS Bloomberg CMCI Platinum Total Return.

The issuer has now priced a total of $125 million principal amount of the notes.

Last week's volume was lower than the $251 million sold the week before if one subtracts the $75 million E-Tracs offering.

Commodities hot again

Commodities picked up last week, reversing a fading trend seen the week before.

Pure commodity-linked notes amounted to 37% of total volume versus only 16% for the week before.

"With equity, you have to pick a name, a country, an investment theme," said the structurer. "With commodities, it's just a view on the future and growth. It's very similar to investing in an equity basket."

With $100 million issued, commodities-linked notes jumped above a third of the total volume.

When including the reverse convertible notes linked to a commodity stock, commodities as a slice of the pie surged to almost half of the total volume as two commodities reverse convertible offerings priced for $17.83 million and $10.3 million, brought to market by Citigroup Funding Inc and Morgan Stanley respectively.

That brings a total of three among the top six deals exposed directly or indirectly to the commodity asset class, according to data compiled by Prospect News.

The number one deal, the UBS E-Tracs, was one of those commodity-linked note offerings.

The other was AB Svensk Exportkredit's $23 million of floating-rate notes due June 21, 2011 linked to the S&P GSCI Industrial Metals Excess Return via Goldman, Sachs & Co.

Finally Citigroup priced $17.83 million of 8.5% Equity LinKed Securities due Dec. 22, 2010 linked to Chevron Corp.

This deal was the fifth largest transaction of the week.

Reverse convertibles

Reverse convertibles made a comeback with $37 million issued in nine deals, or 14% of the total, versus $21 million, or 8.4% of the volume the week before. The average size of reverse convertible deals nearly quadrupled to $4.11 million from $1.1 million.

This result was intriguing to some market participants as last week was marked by a decline in volatility with the CBOE volatility index down by more than 20%. Normally reverse convertible deals are more attractively priced and easier to put together when volatility is up, they said.

Market participants offered several explanations.

"Volatility has declined in the very short end. But most products have longer maturities. Long-term, volatility doesn't drop or spike that quickly," said Bronebakk.

"Volatility is still high; so, reverse convertibles are still being issued. But it won't last long if market volatility continues to decline," said the structurer.

"Maybe dealers are afraid that volatility will continue to drop and they are stepping up the marketing effort before it happens. Because when volatility falls, coupons get low," he added.

"May was bad, and with the eurozone crisis, volatility remains very high. A lot of deals that couldn't get done two months ago are now being priced," said Bronebakk.

"You have a rising volatility in oil, making reverse convertibles very attractive in this sector," he said.

Poor leverage

Also related to volatility was the sales decline of leveraged notes during the week, totaling 32% of the total versus 64% the week before.

As for most other structures, leveraged deals increased in average size though to $11 million compared to $5.5 million in the prior week.

The driver behind this increase in size was the pricing by Goldman Sachs Group, Inc. of $43.23 million of 0% leveraged buffered index-linked notes due July 8, 2011 based on the performance of the S&P 500 index, the second largest deal of the week and one that offered a two times leverage factor.

"Leverage requires buying options, which is still expensive," the structurer said.

"You get leverage when you're able to sell a cap. But with volatility coming down, selling the upside won't pay you enough to buy leverage."

Notable structures

Some of the noteworthy structures included four different index-linked trigger notes tied to the S&P 500 index brought to market by Goldman Sachs for a total of $29 million.

The notes offered a contingent minimum return if the index did not decline beyond a trigger level of 45% to 25% below par depending on the deal.

Credit Suisse AG, Nassau Branch priced $110 million notional amount of capped reverse prepaid put warrants expiring Dec. 22, 2010 linked to the S&P 500 index. Market participants paid attention to this newsworthy structure as it required investors to buy a prepaid warrant rather than investing some principal.

Finally JPMorgan Chase & Co. priced $18.56 million of 0% return notes due June 23, 2011 linked to the MDAX index, which was only the second time this underlying was used in a deal.

The MDAX index is a capital-weighted index that comprises 50 mid-cap issuers based in Germany from classic sectors, or those other than technology.

JPMorgan used this index for the first time a month ago when it priced $14 million on it.

Goldman leads

Goldman was the top agent with $106 million in eight deals for 39% of the total during the week.

It was followed by UBS, coming second for the second time since the last week of May. UBS priced $70 million in two deals for 29% of the market share.

The third agent was JPMorgan, which sold seven deals totaling $37 million, or 14% of the total.

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