Issuance increases 21% to $720 million; commodity-linked issues rise to 31% of total

By Emma Trincal

New York, Feb. 16 - Issuance grew in volume last week to $720 million, up 21% from the prior week, and the bulk of the allocations went into commodities, data compiled by Prospect News shows.

On a year-to-date basis, the growth trend is confirmed with $9.57 billion worth of notes that have priced so far, versus $7.25 billion last year.

"From speaking with advisers, I get a sense that everyone is getting more bullish on everything," said Brad Livingston, a distributor at the Income Solutions Group with Capital Guardian. "People are buying everything - commodities, equities - as they're getting out of bonds and looking for a place to put their money."

The top deal of the week ended Friday was equity based, but it also gave investors some currency exposure, illustrating a trend characterized by investors' desire to invest across several asset classes.

Credit Suisse AG, Nassau Branch priced $76.14 million of 0% notes due Feb. 29, 2012 linked to a basket of three buffered return enhanced components and their related currencies. The components were the Euro Stoxx 50 index, the FTSE 100 index and the Topix index.

Hot commodities

Commodity-linked issuance was exceptionally healthy last week, representing almost a third of the total versus 10% during the week before.

Agents sold $222 million of commodity-linked notes, or 31% of the total in nine deals. It was a strong increase from the $60 million sold in the prior week.

"People are investing where the returns are, and right now, it's emerging markets and commodities," a New York sellsider said.

The second, third and fourth deals of the week were all commodity based. Agriculture commodities notably were on top of the offerings list in size.

"With the global economy growing and crises occurring in emerging markets, some hedge funds are playing the rise in agricultural commodities, fueling a huge rally," the sellsider said.

Barclays Bank plc priced an additional $50 million of its 0% iPath Dow Jones - UBS Grains Subindex Total Return exchange-traded notes due Oct. 22, 2037. It was the second-largest deal. The total issue size is now $362.5 million.

The third offering was Deutsche Bank AG, London Branch's $40 million of floaters due March 15, 2012 linked to the Dow Jones - UBS Commodity Index Total Return index.

Eksportfinans ASA priced the fourth-largest deal, $29.6 million of 0% Strategic Accelerated Redemption Securities due Dec. 2, 2011 linked to the front-month corn futures contract traded on the Chicago Mercantile Exchange via Merrill Lynch, Pierce, Fenner & Smith Inc.

The appetite for commodities was also visible in the choice of underlyings for some mid-size stock deals.

Some of those transactions giving investors exposure to commodities included Bank of America Corp.'s $22 million of coupon-bearing notes due Feb. 28, 2012 tied to Halliburton Co. and Deutsche Bank's $20.52 million of trigger autocallable optimization securities due Feb. 16, 2012 linked to Arch Coal, Inc.

Possible institutional bid

A market participant said that given the types of big commodities deals that priced last week, he wasn't sure whether the trend reflected investors' views.

"I'm not sure if this appetite for commodities is a function of the market outlook as much as product availability," he said.

"Chances are those deals have been pushed by the top distribution channels, not pushed by investors' demand. A bank will generate that interest.

"The wirehouses come out with a product, and they will cram it down their clients' throats."

Another hypothesis, he said, would be that demand for those large commodities deals emanated from institutional investors.

"You could have a mutual fund, a trust, a pension, just somebody behind those deals," he said.

This market participant said that the increase in volume seen last week was not necessarily related to the overall bullishness in the market, as investors put their money in other markets, not just in structured products.

He also downplayed the boost in commodities products as a trend, seeing last week's big deals as atypical.

"If somebody puts a lot of money in grain indexes or uses three times leverage, to me that's not really appealing to the masses. Looks more like it's one buyer," he said.

More stocks

Equity as an asset class declined last week to 60% of the total versus 81% the week before. In volume, the sale of those products was stable at $436 million versus $430 million the prior week. It's the sales amount in commodities that reduced equities-linked products as a percentage of the total.

Stock-linked deals increased in dollar amount ($196 million versus $67 million the week before) while equity index-linked deals declined in volume to $230 million from $362 million.

Both reverse convertibles and autocallable notes increased in volume ($46 million and $54 million, respectively). But some said that the figures remained weak.

"We're seeing a slight improvement in reverse convertibles. But I think it's mostly rollovers," the sellsider said.

"Volatility is still too low. We need a correction for this market to rebound. Unless we have a 5% to 10% correction in equity, I don't see reverse convertibles going anywhere," he said.

Volatility as measured by the Chicago Board Options Exchange Volatility index, or VIX, was down 3.5% last week. The S&P 500 was flat.

As seen in prior weeks, the most popular structure last week was leverage, at 42% of the total.

"This is the same story. Volatility is down, and leverage is up," the sellsider said.

Leveraged deals with no buffers represented 16% of the total, or $114 million in 10 deals.

"People are more bullish, and so they are willing to use more leverage, even without protection," Livingston said.

JPMorgan was the top agent for the week with $204 million priced in 26 deals, or 28% of the total. It was followed by Merrill Lynch and UBS.

"From speaking with advisers, I get a sense that everyone is getting more bullish on everything." - Brad Livingston, a distributor at the Income Solutions Group with Capital Guardian

"The wirehouses come out with a product, and they will cram it down their clients' throats." - A market participant

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