Volume grows five times to $1.45 billion excluding ETNs; picture less rosy for overall volume

By Emma Trincal

New York, May 4 - Volume for the U.S. structured products market increased nearly five-fold to $1.45 billion last week from $305 million the previous week, excluding exchange-traded notes. But the figure was biased by a change of pace in the ETN issuance pattern from one week to the next, data compiled by Prospect News showed.

Including ETN issuance, the overall volume fell by 21% to $1.52 billion last week from $1.92 billion during the prior week.

Agents sold 225 non-ETN deals last week versus 59 the week before.

ETN barometer

The difference between the two sets of figures is due to the fact that last week's ETN volume was frail (4.3% of the total at $65 million) compared to the week before (84% of the total at $1.61 billion).

Sources said the strength of issuance is more and more a function of the vitality of ETN activity.

"The big story here is the growth of ETNs," a market participant said.

"ETNs are a big part of the market now. They provide better liquidity to the investor and maybe that's the reason."

A sellsider agreed.

"ETN growth has been the most important thing going on in the structured market over the last year. People are starting to figure out the importance of ETNs," he said.

Bigger picture

A month-to-month comparison between March and April helps illustrate the impact of any pullback in ETN issuance on the overall market.

Total issuance in April fell to $4.68 billion from $12.81 billion in March, down 63.5%. Excluding ETNs, issuance dropped by just one-third.

ETN issuance dropped in April to 39% of the total from 66% of the total in March, according to data compiled by Prospect News.

"Investors are increasingly focused on transparency, liquidity, and accessing sophisticated exposures," said Nick Cherney, chief investment officer at VelocityShares LLC, an exchange-traded products provider. "ETNs are now a proven structure which offers exactly these benefits."

Issuance volume as of the end of April is up 30% compared to the same period of last year. But excluding ETNs, volume grew by only 2.96%.

"A 3% increase isn't growth. The market has been flat compared to last year," the market participant said.

Confidence prevails

Equity made a comeback last week. Both single-stock and equity index deals rebounded compared to the week before.

Excluding ETNs, equity-related offerings increased five-fold to $1.1 billion from $205 million and rose as a proportion of the total to 76% from 67%.

Agents sold $641 million of equity index-linked products, more than five times the volume of the prior week. This asset class accounted for 44% of the market last week.

The top deal of the week was a plain-vanilla equity index-linked note. Royal Bank of Canada priced $74.15 million of 0% Accelerated Return Notes due June 29, 2012 linked to the S&P 500 index. The notes offered triple leverage on the upside with a 12.72% cap and no buffer. Merrill Lynch was the agent.

Stock-linked deals made for 30% of the total with $437 million issued, up more than five times the prior week's volume.

The third-largest deal of the week and the No. 1 stock-linked product was brought to market by Citigroup Funding Inc., which priced $44.98 million of 7% Equity LinKed Securities due Oct. 26, 2011 linked to Bank of America Corp. shares, according to a 424B2 filing with the Securities and Exchange Commission.

"People are probably more confident, and they're gravitating more around equity," the market participant said, pointing to the decline in volatility.

Volatility as measured by the CBOE Volatility index, or VIX, fell 6.45% last week to 14.75.

Despite higher oil prices and tumultuous global events, investors remain bullish on equity, the sellsider said.

"Equity products sell because the market has been so strong," he said.

"If the market continues to have a strong run, people will remain in equities. Whether it will continue or not is anybody's guess at this point."

Commodities notes doubled in volume to $159 million from $77 million, but their size as a percentage of the total non-ETN volume shrank to 11% from 25%.

The No. 1 commodities deal was also the second-largest offering of the week.

Eksportfinans ASA priced $58.76 million of 0% Accelerated Return Notes due July 3, 2012 linked to the spot price of silver via Merrill Lynch. The notes offered triple leverage on the upside with a cap and no downside protection.

The appetite for commodity exposure could also be seen in large stock deals linked to a commodity stock, although they are not included in commodities figures.

For instance, Morgan Stanley priced $42 million of 9% annualized Equity LinKed Securities due Oct. 25, 2011 linked to Halliburton Co. This reverse convertible offering was the No. 5 deal.

Back to leverage

Leverage with no protection was the most popular structure, and it was used often by Merrill Lynch. This agent employed a formula of triple leverage, capped returns and full exposure to losses in the two top deals of the week as well as in the fourth one, Eksportfinans' $42.67 million Accelerated Return Notes linked to the Energy Select Sector index.

Leveraged structures with no downside protection amounted to $421 million, or 29%, of the total versus $21 million, or 6.8%, of the total non-ETN volume.

Sources highlighted the drop in the so-called fear gauge index as the most likely cause.

"It has everything to do with the decline in volatility," said the sellsider.

"Low volatility reduces the cost of options and makes leverage more affordable," the market participant said.

Reverse convertibles grew to $256 million from $64 million, but sources said that it was business as usual for the end of the month.

Merrill Lynch took the first slot in the league tables last week with $1.2 billion in nine deals, or 15.27% of the total. It was followed by Citigroup with $1.04 billion in five deals, accounting for 13.21% of the total, and by JPMorgan, which priced eight deals totaling $855 million, or 10.91% of the total.

Barclays was No. 1 the week before, followed by JPMorgan and UBS.

"ETN growth has been the most important thing going on in the structured market over the last year." - A sellsider

"People are probably more confident, and they're gravitating more around equity." - A market participant

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