Non-ETN volume slows down while very small deals make a push, especially from RBC

By Emma Trincal

New York, Mach 24 - Issuance of structured notes slowed down with deals decreasing in both size and volume during the week ended Friday.

U.S. agents priced $486 million of standard structured notes, excluding an add-on of iPath S&P 500 VIX Mid-Term Futures exchange-traded notes.

Barclays Bank plc priced $2 billion of the iPath ETNs due Jan. 30, 2019, which brings the total issue to $2.5 billion, according to data compiled by Prospect News.

From the low to the high end of the scale, sources noted the very large ETN on one hand and a flurry of very small reverse convertibles deals emanating from Royal Bank of Canada.

Small average

Excluding the ETN, volume declined by 28% last week compared to the week before when $678 million non-ETN deals priced.

The number of deals was even, 83 last week versus 80 during the prior week, leading sources to pay attention to a surge of much smaller sales.

Deals shrank in average size to $5.85 million last week from $8.47 million the week before, according to data compiled by Prospect News.

RBC activity

The deal size decline was compounded and perhaps caused by an unusually high number of small reverse convertible deals coming to market from Royal Bank of Canada, a source noted.

"Royal Bank of Canada came out with a bunch of reverse convertibles. They did a lot of them," a sellsider said.

Through RBC Capital Markets Corp., Royal Bank of Canada priced $19 million of reverse convertible notes, or less than 4% of the week's volume.

But in terms of the number of deals, Royal Bank of Canada dominated the market, closing 35 reverse convertible deals, or 42% of the total number of transactions conducted last week, according to data compiled by Prospect News.

"One of the challenges for smaller issuers is to built a network of distributors and to secure long-term relationships with them," said the sellsider. "It takes time."

"We've never done that. We just don't do small reverse convertible deals. It's not worth the trouble, is it?" said an equity structurer.

Two trends dominated the top-tier deals during the week.

One was the popularity of rates-linked products - $96 million, or nearly 20% of the week's volume - and the other was the growing importance of floating-rate structures and step-up deals.

Interest for interest products

Interest-rates-linked products tend to be large in size so it came as no surprise that more than a third of the top eight deals, excluding the ETN, would belong to that category.

"You really have some issuers that have the go-ahead from their Treasury departments to issue notes at very attractive rates. It's a funding cost issue," the sellsider said. "A bank with no deposits and lower credit ratings than others will get a competitive advantage when structuring rates deals."

The top deal in size (excluding the $2 billion ETN) was Morgan Stanley's $52 million offering of leveraged Constant Maturity Swap rate curve and S&P 500 index-linked callable notes due March 17, 2030. Part of the appeal of the deal, sources said, is that it is callable at par on any quarterly interest payment date beginning March 17, 2013.

The coupon is 12% for the first three years. After that, the rate will accrue at five times the difference between the 30-year CMS rate and the two-year CMS rate for each day that the spread is at least zero and the S&P 500 is at least 850, subject to a floor of zero and a maximum rate of 20% per year.

The payout at maturity will be par.

Morgan Stanley & Co. Inc. is the agent.

On a smaller scale, Bank of America Corp. priced the second-biggest deal with $34.84 million of floating-rate notes due March 18, 2020 linked to the 10-year CMS rate.

Interest will accrue at 97% of the 10-year CMS rate, payable quarterly.

The payout at maturity will be par.

Merrill Lynch, Pierce, Fenner & Smith Inc. and First Republic Securities Co., LLC are the underwriters.

Rates-linked deals were also structured around the Consumer Price Index such as Bank of America's $20 million issue of floating-rate notes due March 19, 2020 based on changes in the CPI.

The coupon will be 6% for the first year. After that, the rate will be the year-over-year change in the Consumer Price Index plus a spread of 250 basis points, up to a maximum rate of 9%. The coupon is payable monthly and cannot be less than 0%.

The payout at maturity will be par.

Merrill Lynch, Pierce, Fenner & Smith is the agent.

Floaters for all

Another trend was the popularity of floaters. Part of it was due to the success of CMS deals, which use a floating-rate format, almost by default. But the other factor was the use by issuers of floaters for several large commodity-linked deals.

Deutsche Bank AG, London Branch priced $31 million of floating-rate securities due April 21, 2011 linked to the Dow Jones - UBS Commodity Index Total Return.

Goldman, Sachs & Co. on the behalf of AB Svensk Exportkredit sold $21 million of floating-rate notes due April 6, 2011 linked to the modified S&P Diversified Trends Indicator - Total Return, an index of futures contracts on physical commodities and financial instruments.

Hybrid flavor

"You're seeing a lot of hybrid deals right now, in particular, a mix of equity and rates products," said the sellsider.

"People still love leveraged notes. But with volatility lower, they are looking for hybrids. Not just pure participation to the index, but some fixed coupon thrown in there as well."

An example of such a mix was Bank of America's $32.78 million of 10% STEP Income Securities due April 1, 2011 linked to the common stock of Freeport-McMoRan Copper & Gold Inc.

Interest is payable quarterly.

If the final share price of Freeport-McMoRan stock is greater than or equal to the step level, the payout at maturity will be par of $10 plus 2.71%. The step level is 110% of the initial share price.

If the final share price is greater than or equal to the threshold level but less than the step level, the payout will be par. The threshold level is 95% of the initial share price.

If the final share price is less than the threshold share price, investors will be exposed to the decline beyond 5%.

Market limbo

"People like the idea of a fixed coupon, and that's one of the reasons why reverse convertibles are so popular," said the sellsider.

This sellsider said that perhaps issuance diminished last week due to tax season and also market conditions.

"For the last three weeks the market has been a little bit in limbo," he said.

"We thought the Greece crisis was getting resolved, and now it's the Portugal downgrade. It's very hard to market products in this context and to be able to raise funds," he said.

"You're seeing a lot of hybrid deals right now." - A sellsider

"For the last three weeks the market has been a little bit in limbo." - A sellsider

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