JPMorgan is top bookrunner for week; structured notes worth a second look, webinar panel says

By Sheri Kasprzak

New York, Sept. 19 - The top bookrunner for structured products, excluding exchange-traded notes, was JPMorgan during the week ended Friday. It was followed by Barclays and Bank of America Merrill Lynch.

JPMorgan acted as bookrunner for $500 million of offerings, representing 74.77% of the week's deals in 12 offerings. The week before, the investment bank brought $98 million in 18 offerings, representing a week-over-week boost of 407.6%.

Barclays sold $48 million in 14 offerings, representing just 7.13% of structured products offerings, excluding ETNs. The week before, the investment bank acted as bookrunner for $16 million total in eight offerings, representing a 206.98% change week over week.

Bank of America sold $44 million of issues, making up 6.57% of the total weekly issuance in three offerings. The week before, the bank sold just two offerings, making up $59 million, a drop of 25.91% week over week.

Issuance totals $801 million

The week featured $801 million of issuance in 122 deals, up 184.34% from the week before, which featured $282 million.

Excluding ETNs, $668 million of new issues hit the market in 103 deals, up 157.08% from the week before, which featured $260 million in 99 deals.

Smaller deals were the most common this week. Eight deals were $10 million or bigger, up from five deals the previous week. Three offerings were $20 million or larger, down from four the previous week, and only one offering was larger than $50 million, up from none the previous week.

Equity-linked structured products were the most popular, with $571 million of securities offered, making up 85.47% of the market, excluding ETNs. Eighty-two offerings were priced, compared with $218 million in 86 deals the week before, up 162.46% for the week.

Structured notes worth a look

Structured notes were in the spotlight this week, with a webinar dedicated to the benefits of notes over structured certificates of deposit.

Notes, the panel said, might be worth a second look for investors who might otherwise stick with the perceived safety of a structured CD. The presentation was sponsored by S&P Dow Jones Indices.

The market has certainly grown, with $47 billion of U.S. structured note products sold in the past 12 months from 22 issuers across nine asset classes.

Investors are, more and more, abandoning protection for yield as non-principal-protected notes rose substantially in the past year.

Investors who are typically interested in CDs, said Eric Miller, managing director with HSBC, are uncomfortable with substantial risk. Even so, given the current interest-rate environment, these investors might actually benefit from investing in structured notes, Miller said.

Investors may overpay

The advantage of a market-linked CD is that investors are protected by the FDIC.

"It's appealing to investors concerned about the market and about the credit of the issuer," Miller said.

"In our mind, we think that due to the fact that a lot of banks are flush with cash, they're not willing to pay as much for those deposits, so the funding levels banks can achieve with FDIC products is not that appealing. The risk [for structured notes] is not any greater than the risk you'd have with an FDIC-insured product. We believe that you may be overpaying for FDIC insurance in this market. A structured note may be better suited, not that you're taking more risk, but that you're overpaying."

In case of issuer bankruptcy, structured notes can feature principal protection, either total or partial.

Notes have shorter terms

Another advantage these notes might have over CDs is that they have relatively short terms, said Cary Immesoete, managing director with Wells Fargo.

"With market-linked notes, those periods are relatively short, a few years as opposed to an ETN, which is 30 years," Immesoete said.

"Market-linked notes have terms from 12 months to as long as five to six years, or a little longer. The terms are created, the exposure is created, and that exposure may include a measure of principal protection, reflective of opportunity in the market given the conditions at the time of issuance. The subscription period is fixed and locked down. We'll create a product for maybe the next month that reflects the market conditions during that time."

Deutsche Bank prices second-largest deal of year so far

Meanwhile, the second-largest deal of the year priced this week. Deutsche Bank AG, London Branch priced $429.64 million of 0% knock-out notes due March 19, 2014 linked to the Euro Stoxx 50 index, according to a 424B2 filing with the Securities and Exchange Commission.

A knock-out event occurs if the index level decreases by more than 20% during the life of the notes.

If a knock-out event does not occur, the payout at maturity will be par plus the index return, subject to a contingent minimum return of 7.6%.

If a knock-out event occurs, the payout will be par plus the index return, with full exposure to any losses.

JPMorgan Chase Bank, NA and J.P. Morgan Securities LLC are the agents.

The offering is a sharp contrast to the recent trend of smaller deals.

"The flexibility of structured notes allows for customization," said Deryk Rhodes, vice president at Incapital.

"Investors can express a particular market view. The size of deals is coming down, in part because of advances in technology and trading and risk models permit much smaller sizes."

Autocallables linked to oil

Phoenix autocallable securities are among a new crop of offerings coming up in the near future. Quite a few of the securities are slated to price within the next week, including phoenix autocallable securities from Deutsche Bank AG, London Branch linked to the performance of the nearby month's Brent crude oil futures contract as traded on the IntercontinentalExchange.

The short maturity of the Brent crude oil-linked securities is curious, said one sellside source when asked about the offering.

"Autocallables are generally longer," he said.

In fact, the Deutsche Bank securities have a one-year maturity, as opposed to some similar offerings from UBS AG, London Branch, which are linked to corporate stocks and have five-year maturities.

"That's certainly an interesting point. The coupon is larger than typical, which probably is more of a reflection of the volatility of the underlier than the short term," he said.

"If you had a longer term, obviously the risk would be greater. There's more time for circumstances to change. It could be something for investors who believe there is some short-term risk involved in this underlier, which seems reasonable."

Securities pay 15% coupon

If the futures contract closes at or above the threshold price - 80% of the initial price - on a quarterly observation date, the issuer will pay a contingent coupon for that quarter at the rate of 15% per year. Otherwise, no coupon will be paid that quarter.

If the futures contract closes at or above the initial price on a quarterly observation date, the notes will be called at par plus the contingent coupon.

If the notes are not called and the futures contract finishes at or above the threshold price, the payout at maturity will be par plus the contingent coupon. Otherwise, investors will be exposed to the decline from the initial price.

The notes are expected to price Friday.

JPMorgan Chase Bank, NA and J.P. Morgan Securities LLC are the placement agents.

The Cusip number is 2515A1NV9.

"We believe that you may be overpaying for FDIC insurance in this market." - Eric Miller, managing director with HSBC

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