Larger deals suggest a few distributors are getting more aggressive

By Emma Trincal

New York, Jan. 13 - The first week of the year kicked off with above-average-sized deals in the U.S. structured products market.

Excluding the $1 billion of iPath S&P 500 VIX Short-Term Futures exchange-traded notes due Jan. 30, 2019, which Barclays Bank plc priced on Jan. 4, dealers sold nine deals in excess of $20 million between Jan. 4 and Friday, according to data compiled by Prospect News.

Bigger deals

Total issuance amounted to $1.46 billion in 39 deals, including the Barclays iPath ETN. Without taking into account this ETN, the average size for the 38 remaining deals was approximately $12 million. It was about three times greater than the weekly average for the last two weeks of last year.

A sellsider said that it was too soon, though, to conclude that the market is booming early on this year.

Distribution matters

"The big deals are pretty impressive. But it's not necessarily that the market is getting bigger," this sellsider said.

"Some players are more active than others. If you exclude those big players, the question is whether the market is growing or not. You can't just focus on the issuers. You have to look at the distributors as well. The big distributors are JPMorgan and Merrill Lynch. Those two are the most aggressive distributors. Institutions with good, established and well-organized distribution networks are going to grow. The other institutions are not growing by such lumps and bumps," this sellsider said.

For the week, the top agent was Barclays as a result of the $1 billion ETN offering.

It was followed by JPMorgan, which distributed both the second- and third-largest deals of the week. Those were $119.85 million of autocallable notes due Oct. 13, 2010 linked to the Russell 2000 index on the behalf of Barclays and $47.15 million of notes due Jan. 27, 2011 linked to a basket of foreign equity indexes for HSBC USA, Inc.

Merrill Lynch came in third as it distributed two identical deals of $22 million each. Those consisted of floating-rate notes due April 15, 2011 tied to the Dow Jones - UBS Commodity Index Total Return 2 Month Forward on the behalf of AB Svensk Exportkredit.

Barclays' case

For month after month, Barclays has almost always been the top agent, but its distribution practice differs from its main competitors, the sellsider noted.

"The case of Barclays is different. They issue to third parties. They don't have an internal network. They sell to broker/dealers, financial advisers and other institutions, such as Morgan Stanley Smith Barney," he said.

"The question is: Do they have a good distribution network, or do they have good distribution partners? These partners are doing a good job. Barclays, no doubt about it, is putting out good products. But they're not selling it. They're not selling it as much to the end user; they're selling it to distributors."

Very active JPMorgan

JPMorgan was involved in five of the 10 largest deals of the week as a distributor, selling on the behalf of Barclays and HSBC USA. Among the five deals, JPMorgan sold only one it issued itself: $27.99 million of equity-linked notes due Jan. 14, 2011 linked to the share price of EMC Corp.

Merrill Lynch did two of the top 10 deals on the account of Svensk as mentioned earlier.

"JPMorgan is very active. They're putting a lot of Goldman and Barclays paper into their clients' accounts," said a structurer at another bank. "I wonder if they wouldn't benefit from diversifying the credit exposure of their clients through the use of more issuers. At some point, it doesn't make sense for clients to have a large concentration exposure. JPMorgan is a big distributor. They need to expand their issuer rooster."

"Other banks use a number of different issuers," he added. "I think JPMorgan is already feeling pressured to expand its list of issuers."

Popular indexes

Among the most popular underlying last week was the Dow Jones Euro Stoxx 50 index. Among the top 10 deals, HSBC USA used this index in two one-year notes sold via JPMorgan, one for $47.15 million and the other for $29.52 million. Goldman Sachs issued $29.57 million of autocallable underlier-linked notes due Jan. 24, 2011 tied to an index basket with a dominant weight in the Dow Jones Euro Stoxx 50 index.

The Dow Jones - UBS Commodity index was also a popular reference index.

Barclays issued via JPMorgan $23.81 million of buffered return enhanced notes due Jan. 17, 2012 linked to the Dow Jones - UBS Commodity Index 3 Month Forward.

In addition, the two $22 million issues of notes Merrill Lynch sold for Svensk were linked to the Dow Jones - UBS Commodity Index Total Return 2 Month Forward.

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