Investors show renewed interest in currency-linked notes in quiet week

By Emma Trincal

New York, Feb. 10 - Issuance in the U.S. structured products market declined in size in the first week of this month, as is the trend in the early monthly cycle and also given the absence of large exchange-traded note deals, data compiled by Prospect News revealed.

But market sources noticed a new interest on the part of investors in currency-linked deals amid the Greece debt crisis, which led to a reversal of the bearish dollar trend feeding new currency market strategies.

ETN pause

A total of $382 million priced in 60 deals during the week of Feb. 1 to Feb. 5, compared with $1.97 billion sold in 378 during the last week of January.

Unlike what has been seen so far this year, the week did not produce any large ETN offerings.

Sources, though, noticed an innovative structure coming from Barclays Bank plc when the firm priced a $20 million second offering of its Barclays Perpetual Rolling Open Structure Protecting Equity Returns exchange-traded fund notes. The Prosper notes were a repeat of last year's sale of $10 million. The sale was in line with the bank's expectation to do better with its second tranche.

Innovation

Prosper was one of the most attention-getting transactions of the week, as the algorithm-based structure incorporates a new technology that constantly allocates the underlying portfolio between cash and investments in a dynamic way.

"Prosper is an innovative product, no doubt about it," said a sellsider. "But it's a complicated one to explain to retail investors. With a round number like $20 million, my guess - and it's only a guess - is that it was probably sold to an institution."

But overall, deals were small in size, at about $6.5 million on average. The fact that the largest deal was at about $50 million seems to indicate that the market was mostly retail-based, a source said.

PIIGS attack

Goldman, Sachs & Co. priced the biggest deal on behalf of Eksportfinans ASA for $51.76 million. The transaction consisted of currency-linked notes due Sept. 22, 2011 incorporating a bearish bet against the euro. The troubles faced by the euro in the context of Greece's sovereign debt crisis pumped up the value of the dollar against the euro and reactivated a bullish sentiment for the greenback in the global currency market.

From the beginning of the year, the euro has dropped 4.2% to $1.37 from $1.43.

The U.S. structured products market adjusted to the trend with the pricing of $72 million in currency-linked notes, or almost 19% of the week's issuance. Currency represented less than 4% of the issuance during the last week of January, according to data compiled by Prospect News.

Investors rule

"We've seen some moves in the currency market," said a New York structurer. "Whenever there is activity, it spikes investors' interest. What's happening with the euro right now, that's where the action is. A lot of news stories are driving this new inflow. Banks have published research reports on the euro/dollar exchange rate.

"This demonstrates that clients drive the market. A lot of issuers put together a great variety of deals. But the deals that don't generate investors' interest will remain small in size, and those that appeal to investors will be large deals.

"So at the end of the day, investors determine what gets priced. I think we'll see more currency deals coming up."

Besides the Goldman Sachs currency deal, Deutsche Bank AG, London Branch priced $13.06 million of 0% buffered return enhanced notes linked to a basket of currencies due Feb. 18, 2011. JPMorgan Chase Bank, NA and J.P. Morgan Securities Inc. were the agents.

"I think people want to tap into the PIIGS [Portugal, Ireland, Italy, Greece and Spain] theme and express bearish views on the euro," said the sellsider. "Some firms predict that the euro will decline by 1.25 year-end from its current level. Investors are positioning for such move."

The recently coined acronym PIIGS designates the five countries in the euro zone that have galvanized the greatest fears of a sovereign debt default.

Commodities shrinking

Commodities, which were so much in favor earlier this year, pulled back noticeably this week, with only one deal pricing.

Barclays priced $2.58 million of 0% buffered Super Track Notes due Feb. 7, 2013 linked to the Dow Jones - UBS Commodity index. The week before, issuers priced 12 commodity-linked deals for a total of $277 million.

"Commodities were really a hot asset class even recently, but demand is slowing down somehow perhaps due to market fears around China," said the sellsider. "But I think it's going to come back. You'll see more tactical allocations with people choosing between certain kinds of metals or showing a renewed interest in oil maybe."

Buffered style

Buffered notes were one of the most popular structures, with three buffered deals pricing among the five largest transactions.

HSBC USA Inc. priced $31 million of 0% knock-out buffered notes due Feb. 22, 2011 linked to the S&P 500.

Morgan Stanley sold $23.15 million of 0% buffered return enhanced notes due Feb. 25, 2011 also linked to the U.S. equity benchmark.

In addition, HSBC USA priced $19.5 million of knock-out buffer notes due Feb. 25, 2011 linked to the iShares MSCI EAFE index fund.

JPMorgan distributed all three transactions for those issuers.

"Banks are looking for simple structures, easy to sell and easy to hedge, something that is not going to make them lose money," the sellsider said, commenting on the popularity of buffered notes linked to well-known indexes.

JPMorgan tops

The top agent for the week was JPMorgan, which priced $131 million in six deals for 35% of the market share.

Goldman Sachs was next with $102 million sold in 9 deals for 27% of the total.

Barclays Capital Inc. took the third slot with $85 million sold in 18 deals for 22% of the market.

Merrill Lynch, Pierce, Fenner & Smith Inc. only priced one deal of $11.86 million, moving down the league tables from No. 1 the last week of January to seventh.

"Merrill's style is to market their products in the beginning and middle of the month and then to collect the orders at the end of the month, usually in the final week," said the sellsider. "So you have three weeks of marketing and one final week of sales. It's different from JPMorgan. Morgan Stanley has a little bit of a similar style, I believe."

"Merrill is different from others, and you really can't draw conclusions from their weekly ranking," the structurer said. "Some banks do weekly pricing. Others do it twice a month. Merrill does it only once a month, at the end of the month."

"Overall issuance was a little weak," the sellsider said.

"The usual suspects remain on top, with Barclays gathering huge market shares from its acquisition of Lehman Brothers, a firm that had the best exotic equity shop in the market, the best trading platform. And you have JPMorgan that is always doing well simply because they are by far the top private bank in the U.S.," the sellsider added.

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