ETNs and auto-callables dominate heavy issuance week; $1.539 billion sales before Thanksgiving

By Emma Trincal

New York, Nov. 25 - Issuance spiked to new highs in the third week of November due to a combination of month-end volume peaking ahead of the holidays and sale of two highly popular structures: exchange-traded notes and auto-callables.

In the week ending Nov 20, issuers priced $1.539 billion in 66 deals, which is more than six times the prior week's $251 million and twice the number of deals, at 30, according to data compiled by Prospect News.

"This is pretty much the week of deals getting done. It was in a way the last week of the month," said a sellsider referring to the fact that it was the last week before the holiday-shortened Thanksgiving week.

"But you also had the fact that some structures are getting a little bit more creative," he said.

Two "interesting" structures dominated the week, this sellsider said - the $875 million in multiple tranches of leveraged ETNs tied to the S&P 500 Total Return index priced on Nov. 17 by Barclays Bank plc, and two auto-callable notes both sold by JP Morgan from two different issuers for a total of $266.30 million.

ETN appeal

Barclays priced 0% long and short leveraged ETNs tied to the S&P 500 index due Nov. 20, 2014 in five different series.

The sellsider said that the introduction of the ETNs was significant because it allowed investors to use leverage.

"Leverage play is always in demand," he said. The offering was well received by the market as there is no equivalent ETN with such an underlier, sources said.

Auto-callable popularity

While it is to be expected that an ETN offering would contribute a large slice of new issuance, the two auto-callable deals that priced mid-week, represented above-average deal sizes.

Sources said that it was a sign that auto-callable notes were becoming increasingly popular, as they allow investors to get a high coupon in a short time when the notes are called while earning an above-average minimum guaranteed coupon as long as a barrier is not breached on the downside.

On Nov. 18, Barclays Bank plc priced $90.738 million 0% auto-callable index knock-out buffer notes due Aug. 27, 2010 linked to the S&P 500 index. The deal was sold via JP Morgan.

The next day Goldman, Sachs Group, Inc. issued $175.558 million of 0% auto-callable underlier-linked notes due Aug. 27, 2010 based on an index basket of foreign stocks. In this case Goldman Sachs was lead with JP Morgan again acting as co-agent.

The basket included the Dow Jones Euro Stoxx 50 index with a 49% weight, the Topix index with a 28% weight and the FTSE 100 index with a 23% weight.

Institutional impact

"The reason you have those kinds of structures is because you have clients who have a view. They are betting that the market will stay range-bound," said the sellsider.

"With JP Morgan private bank selling it, you can assume that you have sophisticated clients who are aware of the downside of the structure but who like the attractive return," he said, adding that institutional investors were likely to be among the buyers.

Range-bound view

Investors make money from the structure as long as the market does not go up too much or down to the point of breaching the 15% barrier, this sellsider noted.

"If the market is up, you get your 7%. You may be losing a little bit if the market goes up 10% and that's the slippage, that's the risk. And if the market does not go down more than 15%, you get your minimum coupon. That's why it's a bet on the market staying range-bound," he said.

This sellsider said that for giving up interest and sacrificing potentially higher returns than the 7% cap as well as taking on credit risk, investors were given a chance to earn a substantial return in short period of time.

"The future of those auto-callable deals will depend on the market view. But I think it's an interesting substitute for direct holding," he said.

Straightforward structures

Suzi Hampson, structured products analyst at Future Value Consultants, said: "Auto-callables are an easy-to-understand type of structure making it simple for investors to understand the product and understand the payout" and that "it's getting more and more valuable not just for them [the investors] but also from a compliance standpoint."

Structuring ease

Auto-callable notes may also become more frequently issued because they are easy to structure, said a distributor.

"We've done a few in the last couple of months. They're mostly on the equity side. I think that in 2010 auto-callables are probably going to be very popular. They are easy to do. You can structure them in many different ways; you can establish the callability weekly, make them very short-term. It's very flexible," he said.

Barclays tops

The top agent for the week was Barclays with $909 million of the total issuance in 15 deals, which represented almost 60% of the market, followed by JP Morgan with $209 million in seven deals, accounting for 13.60% of the total. The third agent with $200 million in four deals was Goldman Sachs.

These results were not surprising as those agents either issued or sold the top three best-selling structures of the week, sources said. The two auto-callable deals made for 17% of the total and the Barclay's ETNs represented almost 57% of the issuance. Overall, those deals accounted for more than three-quarters of the week's volume.

Principal-protection lags

In comparison, principal-protected notes were not in favor. Only $27 million of those were sold in two deals, for 1.73% of the market.

This was also the result of a week dominated by institutional investors and private banking money.

"Retail is more focused on principal-protected notes while the sophisticated clients tend to have a view and are more willing to take a little bit of downside risk for more return," said the sellsider.

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