Issuance ex-ETNs quadrupled to $1.5 billion, sparked by plain vanilla deals, election week

By Emma Trincal

New York, Nov. 3 - Issuance quadrupled last week compared to the prior week and excluding a large exchange-traded note from Barclays Bank plc, both in volume and number of offerings, but remained relatively stable month over month, data compiled by Prospect News showed.

Agents priced $1.51 billion in 235 deals during the week that ended Friday, a four-fold growth from the $378 million issued in 59 deals during the week before. Last week's figures exclude a $2.5 billion VIX ETN from Barclays.

Month over month, though, issuance was on par with the most active week of September - 226 deals totaling $1.57 billion hit the market during the week ended Sept. 25.

Elections, Fed

"The volume was bigger given this big week with the election, the Fed's meeting. Those events were a unique opportunity to issue more products," said Charlie O'Flaherty, principal at Third Reef Holdings and ex-head of structuring at Bank of Ireland.

Volatility as measured by the Chicago Board Options Exchange Volatility index, or VIX, rose by 7% to 21.2 during the course of last week.

"I think the election results drove volatility. The Fed today was a big deal. A lot of volatility was priced in last week. Plus, it's the closing of the month," O'Flaherty said.

Another growth factor was the multiplication of bigger deals, excluding ETNs. Agents priced 30 deals in the $10 million to $20 million size last week, versus eight in that size bracket the week before. There were 15 deals comprised between $30 million and $75 million in the week ended Friday, compared with zero the week before, according to data compiled by Prospect News.

Pouring into equity

Equity issuance surged to over $1 billion from $230 million the week before. The number of deals surged too to 187 from 40.

"People are getting less reticent to own equity," said Tom Livingston, director of structured products at Halliday Financial Group.

"Quantitative easing is good for equity. It will compress yields even further, pushing people to move into riskier assets."

Within equity-linked products issuance, indexes and exchange-traded funds took precedence over stocks, a reverse trend from what happened the week before when stock deals, especially big ones, overwhelmed the market.

Equity index-linked deals grew to $666 million from $81 million. As a percentage of the total ex-ETN volume, they grew two-fold to 44% from 21%. In addition, the volume of notes linked to ETFs increased to $155 million from $4 million, or to 10% of the total market excluding ETNs from 1%.

Flood of reverse convertibles

Meanwhile, reverse convertibles continued their escalation, a typical trend for the end of the month. More telling was the burgeoning of deals - the number grew to 112 from 15 - which pushed up volume to $233 million from $44 million.

Most reverse convertible deals were small in size. One exception was Citigroup Funding Inc., which priced the fourth-largest deal of the week in a $74.32 million offering of Equity LinKed Securities linked to MetLife, Inc.

"If volatility continues to expand as last week, I would expect reverse convertibles to continue to be bigger in both number of deals and volume," Livingston said.

One factor behind the multiplication of small reverse convertible deals, he suggested, had to do with the fact that registered investment advisers are looking at those products more and more; yet they are coming to use them gradually.

"They'll pick a stock that they like. And they'll do a reverse for a couple of millions as a way to build a long position," he said.

Some of the favored picks may not necessarily trade in large volume, he said, leading issuers to sell many small offerings tailored to a variety of individual advisers.

"Reverse convertibles are used to tiptoe into equity. You get paid 10% to wait and you take a position in a stock that you want. That's why structured products are going to be a bigger part of people's portfolios," Livingston said.

Callables, Step-Ups & Co.

Other factors contributed to last week's robust issuance volume, some of which were not related to equity market forces.

"You have to look at what's driving the deals," a sellsider said.

"There's a lot of callable, lightly structured paper driving these numbers, things that are not that affected by volatility."

Sources noted the resurgence of "plain-vanilla" notes, usually coming from the traditional fixed-income desks. Most of those structures consist of step-up notes, fixed-to-floating-rate notes and capped floaters.

"The traditional fixed-income investor is looking into those exotic products again," said O'Flaherty. "They used to be big in the mid-1990s. As that blew up, people got burned and the pendulum swung the other way toward more conservative structures.

"Last month for instance, I saw for the first time some step-down notes. These are pretty aggressive structures. I hadn't seen that since 2000.

"In the past couple of months, those fairly complex coupon structures, which are callable with a nice visual coupon, are making a comeback. My gut feeling is that retail investors are buying it.

"There's increased traffic in this low-interest-rates environment. As people are more and more desperate for yield, they look for more and more exotic structures."

Some said that the popularity of those deals can also be attributed to the fact that investors tend to use these products as defensive plays in a portfolio, in particular as a hedge against inflation.

"They're easy; they protect you from inflation; your coupon will step up in a rising-rates environment," the sellsider said.

The top deal in this plain-vanilla category came from Goldman Sachs Group, Inc., which sold $70 million of 15-year callable step-up fixed-rate notes at par.

The coupon is 4.25% for the first six years, 5% for years seven through 11 and 7% for years 12 through 15.

Barclays tops

The top agent of the week was the seller of the leading structure: Barclays, the No. 1 agent, priced an additional $2.5 billion of its iPath S&P 500 VIX Short-Term Futures ETNs due Jan. 30, 2019.

Merrill Lynch came second with $666 million sold in 19 deals. Bank of America issued the second- and third-largest deals of the week with a $94.95 million offering of capped and leveraged notes tied to the S&P 500 index as well as an $84.92 million issue of leveraged notes tied to the price of silver.

Commodities in general did well last week with a total issuance volume of $243 million, nearly six times the amount of the previous week, or 16% of total non-ETN issuance.

UBS was the third agent with $284 million executed in 31 deals it sold for itself as well as for a variety of issuers such as HSBC USA, Inc., Barclays, Royal Bank of Canada, Deutsche Bank AG, London Branch and JPMorgan Chase & Co.

"People are getting less reticent to own equity." - Tom Livingston, director of structured products at Halliday Financial Group

"As people are more and more desperate for yield, they look for more and more exotic structures." - Charlie O'Flaherty, principal at Third Reef Holdings and ex-head of structuring at Bank of Ireland

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