Single big deal pushes up volume to $584 million, relatively unknown issuer joins the fray

By Emma Trincal

New York, Oct. 28 – Structured products issuance volume would have been seriously low last weak – were it not for a $350 million deal issued by a Goldman Sachs Group subsidiary, sources noted based on data compiled by Prospect News.

What made a difference was GS Finance Corp.’s $350 million of leveraged buffered notes due Oct. 5, 2016 linked to the S&P 500 index. It was the third largest offering of the year.

Fresh name

“I have not seen this GS Finance entity before. I wonder why they issued the deal through an affiliate,” a market participant said.

“I don’t think it has anything to do with funding. [Goldman Sachs Group, Inc.] is still the guarantor,” he added.

Sources said that Goldman may have chosen to issue notes through a subsidiary and not the holding company as a way to comply with the Dodd Frank Act requiring banks to come up with a resolution plan, also known as living will, describing how they would wind themselves down in the event of a bankruptcy.

A total of four structured equity-linked notes issued by GS Finance have been brought to market in the past: two in 2008 and two last summer, according to Prospect News data.

Institutional

The market participant said that the terms were attractive.

“We see a lot of that product: short-term, one-to-one on the downside, leverage to a cap. Merrill has a lot of this. So adding a 5% buffer in there is more attractive. I don’t think I have seen this structure with a buffer,” he said.

“It’s very straightforward. The terms are really good. I wonder how they did it. It’s not by using the dividends. The non-payment of dividends is common to every note. It’s part of the cost of producing the leverage and the buffer.”

More revealing was the 5 basis points fee.

“Interesting...They skinned up the price, that’s one way to do it,” he said.

“With that size and that fee, it’s definitely an institutional deal. Guaranteed. Someone came in to do their own stuff.

“It matures in less than one year. That’s another sign that it’s institutional. It’s a tax-deferred structure, a pension probably.”

Short tracker

Another “intriguing” offering – the second in size – was brought to market by Deutsche Bank AG, London Branch. The $48 million of 0% notes due Jan. 26, 2016 was a delta one product linked to the MSCI Europe index.

One of the benefits of tracker notes, especially when there is no exchange-traded fund to replicate the underlying index or asset class is to offer access, he noted.

“But I don’t think that’s the reason here,” he said.

“I get that someone would want exposure to this index. But why only three months? That’s the part that puzzles me.

“The notes mature in January. Perhaps someone directly invested in the index wants to take a loss in the current year and is using this as a bridge to maintain the exposure. Other than that, I don’t quite get the purpose to that.”

Volume

The data was skewed given the size of the $350 million deal, which accounted for 60% of the volume. Without it, volume would have been among the lowest this year, according to Prospect News data. The worst week so far has been the first week of October with $300 million.

But with the $350 million deal, the month to date volume is up 30% from last month although down 8.5% from last year.

For the year, volume is up only 5.10%. Just before the summer, the year had an advance of 15%.

Non-U.S. indexes popular

Notes linked to international equity indexes accounted for 31% of the total, excluding the GS Finance deal. Europe was the asset class of choice through the MSCI Europe index and the Euro Stoxx 50 index, but also emerging markets, with investors gaining exposure via the iShares MSCI Emerging Markets exchange-traded fund and the Vanguard FTSE Emerging Markets ETF.

“Maybe volatility has spiked so we’re seeing short volatility products coming out on emerging markets,” said a structurer.

Protection

Investors showed interest in leveraged notes with partial protection or without.

Without including the GS Finance deal, $33 million of the sales went to buyers of leveraged deals with no downside protection while $35 million was bought by investors who wanted a barrier or a buffer, the data showed.

“Most of our deals have some form of protection at least on our platform. But in general, you find both types,” a sellsider said.

“Either clients say – give us a lot of leverage without protection so we can maximize our returns out of small moves. That’s the range-bound view.

“Or they’re more skittish. They want less leverage or a coupon with some level of embedded protection.”

The structurer explained how an increase in volatility levels may facilitate the pricing of protection.

“You’re buying volatility and selling volatility at the same time,” he said.

“When volatility is richer, the short volatility part gives you more but you also have to spend more on the purchase of the options.

“When you put together a leveraged note with some sort of barrier or buffer you sell an out-of-the-money put and you buy an at-the-money call.

“A lot of what you can do depends on the skew. The greater the volatility, the greater the impact further away from the strike. So your put selling out gives you more money than you spend on the call. The spread works in your favor. This way but not always it can be easier to place a barrier on a note when vol goes up.”

Some rates

Smaller in size but ranking sixth to eight among the week’s deals, three issuers priced fixed-to-floating rate notes tied to the 10-year Constant Maturity Swap Rate.

Citigroup Inc.’s $14 million notes offered 3.5% for the first three years on a 10-year term.

Wells Fargo & Co. and Goldman Sachs Group, Inc. each priced 12-year fixed-to-floating notes. The first three years offered a fixed rate of 4% and 4.25% respectively.

The top agent for the week was Goldman Sachs with $503 million of the total, or more than a third of the total volume, including the GS Finance deal. It was followed by JP Morgan and Credit Suisse.

“With that size and that fee, it’s definitely an institutional deal. Guaranteed. Someone came in to do their own stuff.”

-A market source, commenting on GS Finance’s $350 million offering.

“Maybe volatility has spiked so we’re seeing short volatility products coming out on emerging markets.”

-A structurer.

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