E-mail us: service@prospectnews.com Or call: 212 374 2800
Bank Loans - CLOs - Convertibles - Distressed Debt - Emerging Markets
Green Finance - High Yield - Investment Grade - Liability Management
Preferreds - Private Placements - Structured Products
 
Published on 10/12/2011 in the Prospect News Structured Products Daily.

First week's sales could be worse, sources said; Deutsche Bank leads the pack amid rally

By Emma Trincal

New York, Oct. 12 - The first week of October was not so bad, sources said. The week benefited from a rally and the increased activity of the private banks, in particular Deutsche Bank, which sold nearly a third of the volume.

Agents priced 85 deals excluding exchange-traded notes totaling $233 million in the week ended Friday, an 87% decline from the last week of September but only an 8.5% drop from the first week of September, according to data compiled by Prospect News.

Private banks

"It was not a bad week for the early part of the month," a sellsider said.

"The first week of the month is kind of strange. It's always slow because the calendar closes at the end of the month.

"Retail deals, the large BofA offerings fairly depend on the calendar. But you have the small private bank deals that get done because private banks are a bit more flexible. They have a few clients they can schedule anytime."

This sellsider noted that this is exactly what happened with Deutsche Bank, which was only the No. 5 agent in the last week of September but led the league tables last week with three deals totaling $70 million, or 30.13% of the total.

German franchise

The S&P 500 was up 5% last week while the CBOE Volatility index, or VIX, dropped 20% to 36 from 45. The VIX measures implied volatility on S&P options.

The decline in volatility was rapid. The 45 level on Oct. 3 was the VIX's second-highest level since Aug. 8, its peak for the year.

Deutsche Bank is usually not ranked on top of the weekly league tables, the sellsider noted.

"I think the biggest reason is that they're a private bank, and private banks sell deals on an opportunistic basis," he said.

"They are quicker to react to changing market conditions, and we had a rally last week after weeks of falling prices."

The sellsider noted that the S&P 500 reached its low on Oct. 3, precisely at the beginning of the week.

"It's possible that clients saw a turnaround and Deutsche Bank wanted to jump in, thinking 'Why wait for the middle of the month?' This would have precipitated some of those deals," he added.

The second agent was JPMorgan, also a private bank, with 22.96% of the volume and $53 million sold in five deals.

"That doesn't surprise me. JPMorgan is also a private bank. They're moving faster. They're more opportunistic. They do their deals on a weekly basis," the sellsider said.

The sellsider invoked another explanation for Deutsche Bank's active presence in the market last week.

"If somebody wants to buy European banks and is looking around, Germany is still considered the best economy in Europe. That may be the reason they were able to sell that much last week," he said.

The credit default swap spread for Deutsche Bank is 170 basis points, which is wider than JPMorgan at 150 bps. But compared to Goldman Sachs (275 bps) and Bank of America (365 bps), the CDS spread appears rather tight, he said, which indicates that the cost of protection against Deutsche Bank's default is not among the highest, reflecting a perception of lower credit risk.

"It's all a matter of perception, but with the turmoil in the euro zone, Germany having the strongest economy, people see German banks as being able to weather the storm."

Rally

Sources said that the equity rally was probably a good thing for the issuance pace, predicting that volume may have been weaker otherwise.

Deutsche Bank was probably prepared for the new market conditions, a distributor said.

"Maybe they were able to strike all at once. I would suspect they had a pipeline ready to go," he said.

"For our participants, the combination of a rally and volatility coming in offered still a good opportunity to strike notes," the sellsider said.

"We wanted to strike this week and get orders sooner than later so issuers can pre-hedge themselves and lock in the economic terms that were available early on.

"When the market falls, people are looking for a turnaround. Some people want to wait for signs of a rally before making a move."

Top issuer

Deutsche Bank AG, London Branch issued the top three deals. Deutsche Bank was the agent for the first and third ones among those. JPMorgan was the agent for the second-largest offering.

Deutsche Bank priced $38.9 million of securities due Jan. 11, 2013 linked to the Dow Jones - UBS Commodity Index Total Return. It was the top deal.

Interest equals one-month Libor minus 15 bps and is payable monthly.

The securities will be called if the index declines by 15% or more.

The payout upon redemption or at maturity will be par plus triple the sum of the index return minus the T-bill return minus an adjustment factor.

The No. 2 deal was Deutsche Bank's $36.77 million of 0% capped knock-out notes due Oct. 24, 2012 linked to the S&P 500 index. If the index falls by more than 44% from the initial level during life of notes, the investor is long the index subject to a 10% cap; otherwise, the payout is par plus 10%.

Finally, Deutsche Bank issued and sold $26.5 million of floaters linked to the Dow Jones - UBS Commodity Index Total Return.

The payout at maturity will be par plus triple the sum of the index return minus the TBill return minus an adjustment factor.

Commodities

While all asset classes fell, commodities held up better and represented 40% of the total volume with $93 million in six deals.

"Commodities are very similar to equities," the sellsider said, comparing the correlation between the S&P 500 and the S&P GSCI index.

"Commodities hit a low on Oct. 4 and have rebounded since then. They had a fairly bad two weeks before that, so people may have seen an opportunity to try and get back into the market at the bottom."

Equity-linked notes represented 52% of the total, with 46% in equity index-linked products, 5% in stocks and 1% in stock baskets.

Buffers

While leveraged notes without downside protection continued to remain the dominant structure (47.5% of the total issued last week), investors are beginning to appreciate the benefits of downside protection, the distributor said.

"As the market heads up, you're starting to see more advisers realizing the advantage of having buffered notes," he said.

"They may have an ETF like SPDR or what have you. As volatility moves, they're selling in the rally and redeploying the proceeds into buffered notes linked to the same exposure. They get the same 1.5 or 2 times performance of the exposure, with some protection."

Leveraged notes with downside protection represented $34 million this month to date, up 24.65% from the same time last month. The structure also accounted for a larger percentage of the total: 14.7% versus 10.8%, according to data compiled by Prospect News.

Cloud computing

Exchange-traded notes, which are not included in these figures, represented $16 million last week against $3 million the week before.

One interesting innovation in this category was UBS AG, London Branch's $10 million of 0% monthly 2x leveraged exchange-traded access securities due Oct. 4, 2041 linked to the ISE Cloud Computing Total Return index.

The notes provide a monthly compounded two times leveraged exposure to the performance of the ISE Cloud Computing index, which is a total return index that provides a benchmark for investors interested in tracking companies actively involved in the cloud computing industry.

The index was created on June 6 and currently consists of 40 companies, including Amazon.com, Inc., Apple Inc., Cisco Systems Inc., Google Inc. and Oracle Corp.

UBS plans to sell up to $100 million of the notes. The initial $10 million of notes priced at par of $25. The remaining $90 million will be sold from time to time at varying prices.

"If somebody wants to buy European banks and is looking around, Germany is still considered the best economy in Europe." - A sellsider

"As volatility moves, [advisers are] selling in the rally and redeploying the proceeds into buffered notes linked to the same exposure." - A distributor


© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.