Short week sees sluggish issuance; equity-linked note investors run for the exits

By Emma Trincal

New York, June 8 - Sales of structured products fell by 90% last week. Agents had to deal with two headwinds: a holiday-shortened week and the typical slow start of a month. Sources added that the market itself, which encountered a sell-off last week, was not an incentive for business either.

Issuance volume, however, held well on a month-over-month basis, down by less than 3%.

Sources said that investors continue to exit equity deals, a reflection of more skittishness and risk aversion in the overall market.

"It's calm, very calm," a sellsider said. "There's the anticipation of the end of QE2, the view that rates will rise. People don't see where the market is heading. Volatility has no clear direction. Coupons aren't paying that much."

Agents sold $175 million of non-exchange-traded notes in the week ended Friday, down 90.13% from the week before, according to data compiled by Prospect News.

The number of deals dropped considerably too, down 86% to 34 deals last week from 249 the week before.

Deals were much smaller in size. There were six deals over $50 million each during the week ended May 27 but none last week.

For some though, it was business as usual.

"It's pretty normal to start the month on a slow note," said Thomas Livingston, director of structured products at Halliday Financial Group.

Bigger picture

On a month-to-month basis, last week was not any slower than the first week of May. Agents priced 20 deals versus 21 the month before and sold $100 million versus $97 million.

But some are noticing a slowdown that began in April and accelerated in May.

The U.S. structured products market has grown only 3.21% year to date to $19.67 billion from $19.05 billion last year, according to data compiled by Prospect News.

Market noise

"There's a lot of noise going right now about the market. Everything is fairly volatile. People are trying to get a better handle on risk," said Livingston.

All asset classes diminished in dollar amount. But as a percentage of the total volume, equities dropped and commodities rose, perpetuating a trend seen over the past few weeks.

From the week of May 23 to last week, the market share of equities declined from 69% to 27.5%.

At the same time, commodities filled more space, rising from 17% to 58% of the total.

The same trend also prevailed month to month with equities moving from two-thirds of the volume to only one-third.

Commodities increased by nearly six-fold to $57 million last week from $10 million during the same week of May. They accounted for 57% of the total, up from 10%.

"Is this a function of people moving into commodities or out of equities? Probably a little bit of both," said Livingston.

"The shift away from equities doesn't surprise me. With the market being the way it is right now, I would suspect that mutual funds have seen some outflows as well."

The S&P 500 lost 3.5% last week, declining below the 1,300 threshold on Friday for the first time since March. Volatility, as measured by the CBOE Volatility index, or VIX, jumped 16% to 17.95.

"With people not understanding what the Fed is going to do this month and the European headlines, more people are shifting to more defensive postures," Livingston said.

Without a net

Despite the increased caution seen in the market, investors continued to use leveraged notes with no protection.

This type of structure was the most popular last week with $71 million, or 41% of the volume, according to data compiled by Prospect News. From May to June, this type of deal saw its part of the total issuance grow from 20% to 60%.

Only five buffered notes priced last week and among them, only one was a leveraged product.

"I think people are expecting a correction for this summer," the sellsider said. "They're waiting for good entry points to do leverage.

"Obviously if prices decline in August, leverage will be better then."

Livingston said that the multiplication of non-buffered deals could give the industry a black eye down the road if the market goes through a correction.

"It's bad for the industry. A lot of these deals appeal to investors because they give uncapped returns or minimum coupons," he said.

"But if the market moves against you, you're going to get hurt, and that's not going to be good for our market."

Top deals in commodities

The four largest deals were all commodity-related, illustrating the current popularity of this asset class despite a recent correction.

Goldman Sachs & Co. priced the top deal with $31 million notes linked to the S&P GSCI Excess Return index for AB Svensk Exportkredit. The notes due June 13, 2012 offer at maturity par plus triple the change in the index less three times a final fee of 0.2% per year.

Coming second was Deutsche Bank AG, London Branch's $20 million of 0% market contribution securities due June 5, 2014 linked to the Deutsche Bank Liquid Commodity Index - Mean Reversion Enhanced Total Return. The payout upon redemption or at maturity will be par plus the index return minus an adjustment factor of 0.95% per year.

Bank of America Corp. priced $13.94 million of 0% Accelerated Return Notes due June 18, 2012 linked to the Merrill Lynch Commodity index eXtra - Excess Return index. The payout at maturity will be par of $10 plus double any gain in the index, up to a 13.21% cap. Investors will be exposed to any index decline.

Credit Suisse AG, Nassau Branch priced an additional $10.36 million of 0% exchange-traded notes due April 20, 2020 linked to the Cushing 30 MLP index. The sale brought the amount of notes issued so far to $166.84 million

While not directly linked to a commodity underlying, the add-on reflected investor interest in energy through master limited partnerships.

Goldman tops

Goldman Sachs was the top agent of the week with $42 million sold in three deals, or about a quarter of the total non-ETN market. Merrill Lynch followed with two deals totaling $22 million, or 12.33% of the issuance. Deutsche Bank was No. 3 with $20 million in two deals, or 11.7% of the volume.

Barclays was the top agent the week before, followed by JPMorgan and UBS.

For the year to date, the top agents are Merrill Lynch first, JPMorgan second and UBS third.

"It's pretty normal to start the month on a slow note." - Thomas Livingston, director of structured products at Halliday Financial Group

"I think people are expecting a correction for this summer." - A sellsider

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