Principal-protected products the way to go, structurer says; July volume was hot, August may cool off

By Sheri Kasprzak

New York, July 28 - When it comes to structured products, investors right now are looking to principal-protected products and yield-enhanced products, one equity derivatives structurer based in New York said in a recent interview.

"We're basically looking for products that offer yield enhancement," said the structurer.

On the other hand, he said: "When you're in a higher-rate environment, you're looking for a lower absolute rate. Asymmetrical return trades are particularly beneficial on the upside because they're principal-protected."

Another New York-based investment banker said he can understand why investors are seeking principal-protected structures.

"It makes sense to me," he said. "It's pretty obvious that if you're making an investment in these [products], you want to make sure that you get at least what you put into back. That's the whole point, isn't it?"

A recent example of principal-protected products comes from Deutsche Bank Securities Inc., which underwrote $1,541,000 in buffered underlying securities linked to the Dow Jones AIG Commodities Index and the U.S. CPI Urban Consumers YoY NSA issued by Eksportfinans ASA. The offering, principal protected up to a 20% decline in the basket, settled Monday.

The BUYS are due July 31, 2009 and include 20% principal protection.

Another recent principal-protect product came from Citigroup Funding, Inc. The company priced $1,591,500 in principal-protected notes linked to the Standard & Poor's 100 index. Holders participate in 81% of the upside. Those 0% notes are due April 29, 2010. That offering settled July 28.

July was an active month

One source said July was a particularly good month for structured products for his investment bank.

"July was pretty busy," he said. "It's been active for a July. July and August tend to be fairly quiet."

Another source at another New York-based investment bank said he agreed with the assertion that volume was pretty decent.

"Well, it is for this time of the year," he added, noting that summer tends to be slow in general for these structured deals. "From what I'm seeing now, August isn't nearly as busy, so it'll probably fall off to normal summer levels later on. By September, things pick up."

July saw $1.07 billion of structured products linked to either a single stock, an equity index or a basket of stocks or indexes, according to data compiled by Prospect News, lifting the year-to-date total to $11.41 billion. July's volume was down slightly from the $1.22 billion in June.

The first source said he is already working on products for September.

Looking at what Bear Stearns did in July, most of the deals have been linked to a basket of multiple indexes.

Among the basket-linked deals were 0% principal-protected notes due August 2010 announced July 20. The basket those notes are linked to include the Standard & Poor's 500 Euro Stoxx 50 and the Nikkei 225 indexes.

Also on July 20, the company announced plans to price 0% principal-protected notes due August 2010 linked to a basket that includes the Standard & Poor's 500 composite, Dow Jones Euro Stoxx 50 and Nikkei 225 indexes.

Earlier in July, on July 11, Bear, Stearns priced a $1,575,000 issue of one-year 15% reverse convertible notes linked to Petróleo Brasileiro SA stock and on July 6, the company priced a $1.1 million issue of 10.5% reverse convertible notes linked to Caterpillar Inc.'s stock. Those notes are due July 6, 2007.

Reverse convertibles popular

A source familiar with the Bear deals said reverse convertibles seem to be pretty standard and common.

In fact, the investment bank priced a $2 million one-year reverse convertible note issue linked to Wheeling-Pittsburgh Corp. on Friday.

The 14.5% notes mature Aug. 1, 2007. The deal is set to close on Aug. 1.

The Wheeling deal is a "one-off" for the company, Bamber said.

"The client wanted it structured in that way," he said.

Those offerings were certainly common at Barclays Bank plc in July. The majority of the offerings coming through the company were reverse convertibles.

The most substantial of those deals, in terms of size, was $9.5 million in reverse convertible notes linked to Apple Computers, Inc. Those notes were sold on July 25.

Another substantial reverse convertibles deal from Barclays was $8 million in reverse convertibles linked to Aetna Inc. and settled on July 25.

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