Goldman Sachs deal lifts structured products volume to $2.42 billion; short-term leverage preferred

By Emma Trincal

New York, Feb. 3 – Agents sold $2.42 billion in the week ended Friday, which closed the first month of the year, but nearly half of the notional came from just one deal of more than $1 billion issued by Goldman Sachs Group Inc., according to data compiled by Prospect News.

For the week, 261 deals were brought to market.

Volume for January at $4.28 billion beats December’s $3.08 billion, which is normal given the cyclical annual calendar which typically reveals January, February and March as the best months. However without last week’s exceptionally large offering, volume at $3.21 billion would not have been very much higher than December’s $3.08 billion.

And even with the $1 billion deal, January this year is weaker than January’s $5.07 billion a year ago, the data showed.

Record size

“Look, we’re having a good month and this huge deal is a big part of it,” a market participant.

“Are the numbers going to get skewed because of it? Sure they are. When one deal takes half of the volume, things are going to get skewed. But I’m sure we had big deals a year ago too.

“To me this is very encouraging.”

Goldman Sachs Group priced on Friday $1.07 billion of 0% leveraged notes due Feb. 23, 2017 linked to a basket of indexes – the Euro Stoxx 50 index with a 58% weight, the FTSE 100 index with a 19% weight and the Topix index with a 23% weight.

The upside offered two-times leverage up to a 27% cap. Investors were fully exposed to the decline.

Goldman Sachs & Co. was the underwriter.

“It’s big,” a sellsider said.

This deal was the second largest structured note offering going back to June 2005, according to Prospect News’ database.

The data exclude exchange-traded notes and plain-vanilla fixed-income products such as step ups, fixed-to-floating notes and capped floaters. It only tracks structured notes registered in the United States.

The largest deal for that period was UBS AG’s $2.2 billion 18-month 22% mandatory exchange notes linked to Time Warner, Inc., which priced in February 2006.

Top agents

“Goldman has made progresses. I’m not sure it’s an institutional offering. It’s a 13-month. Usually it’s retail that wants to avoid short-term capital gains. Most institutions don’t care about it,” said the market participant.

As a result of the deal, Goldman Sachs naturally tops the league table for the week and the month.

Last week Goldman Sachs priced $1.16 billion in 25 offerings, or 47.9% of the total. Bank of America sold 20 deals totaling $569 million or 23.5% of the volume. JPMorgan was third with $318 million in 62 deals, or 13.1% of the market.

However, without the top deal, Goldman Sachs’ average deal size is only $3.75 million.

“This month Goldman is first. But Merrill will catch up,” the market participant said.

“Certainly that one deal is what puts [Goldman Sachs] on top. But it was a one-off. If you take this deal out, they are behind. I wouldn’t say Goldman Sachs is taking over the league tables. It just happened this month,” said the sellsider.

Top deals

Other unusually large deals were brought to market last week as well.

Credit Suisse AG, London Branch priced the second-largest offering with $126.75 million of six-month leveraged notes linked to the S&P 500 index. The agent was JPMorgan.

The upside leverage factor was two; the cap was 12.2%. There was no downside protection.

Canadian Imperial Bank of Commerce issued the third-largest offering, $121.24 million of 0% Accelerated Return Notes due March 31, 2017 linked to the S&P 500 index.

BofA Merrill Lynch was the agent.

“They’ve done really well. They started with Merrill not that long ago. This market gives investors good entry levels. They took advantage of the good pricing conditions,” said an industry source.

CIBC issued its first note with Merrill Lynch as the agent last July, according to the data.

The 14-month notes provided a 300% upside participation rate with a 15.18% cap. Investors were fully exposed to the downside.

The next two deals were both issued by Bank of America Corp. The first one for $86.04 million was a 14-month leveraged note linked to the Euro Stoxx 50 index. Leverage was three times; the cap was 20.46%.

The other, another three-times leveraged was a $44.88 million two-year note linked to the S&P 500 index with a cap of 20.85%.

None of those short-term products offered any barrier or buffer.

Leverage, high caps

A prevailing trend last week was investors’ heavy bid on leveraged notes with no barriers or buffers. The top six offerings were leveraged and capped notes with short tenor and no downside protection.

“People are going into leverage buying on the dip. Investors believe that with the market correction of the past few weeks, it’s better to have a higher cap than a buffer. It’s a short-term play. Not everyone has this type of view but those deals sell pretty well,” the market participant said.

The sellsider explained that his firm is considering jumping into the fray, noticing the popularity of short-term bets with leverage and competitive caps.

“It’s not a structure that we’ve done a lot but we see the success others are having. We’re trying to get our people to understand why you would use something like that, why it makes sense short term and how to use it tactically,” this sellsider said.

While the absence of any barrier or buffer appears at first risky, those products, thanks to the leverage, can offer valuable market risk mitigation, he explained.

“If I have a two times leverage on an equity index, instead of putting $100,000 in the index fund directly, I can just put $50,000 and get the same upside exposure. While I don’t have any downside protection, I’m only putting out half of my capital. If I’m wrong and the underlying goes down, I have half of the downside exposure and I have the same upside exposure because of the leverage,” he said.

“The cap is very generous given the timeframe. When you see a six-month note with a 12% cap or a one-year with up to 27% return, it’s very enticing. The chances of outperforming the market are pretty high and so we’re looking into it,” he said.

“Investors believe that with the market correction of the past few weeks, it’s better to have a higher cap than a buffer. It’s a short-term play.” – A market participant

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