Issuance drops amid holiday distractions; commodities gain steam; bear note sees strong demand

By Kenneth Lim

Boston, Sept. 15 - Structured products issuance fell in the holiday-shortened week ended Friday.

Commodities continued to draw strong demand, while Eksportfinans ASA saw some success with an unusual bear product.

Overall issuance in the past week totaled about $262.32 million, down from $2.51 billion the week before. But $2.28 billion of exchange-traded notes were issued in the first week of September, skewing numbers for that week.

The week ended Friday also had a $112.7 million offering of three-year mandatory exchangeable notes issued by UBS AG linked to the common stock of GT Solar International Inc., which was marketed as an institutional deal.

Markets were closed on Sept. 6 for Labor Day, and Rosh Hashanah occupied the latter part of the week, which affected volumes.

"Overall, it was just a very quiet week for the markets," a structurer said. "Inquiries slowed down a little, and there wasn't enough people in the market to really get a big deal done."

The structurer said the slowdown was expected and has not caused any concerns.

"It's not a big deal," the structurer said. "Two holidays in one week will inevitably affect business. We're still seeing solid demand in the market, and we expect to continue at a strong pace for the rest of the year."

Commodities draw interest

Products linked to equities and equity indexes accounted for about 91.41% of the notes issued during the week, although without the GT Solar exchangeables the percentage of equity-linked notes was 84.94%.

But some of the most popular issues in terms of individual deal nominal amounts were commodity-linked products.

The largest commodity-linked offering in the week came from Deutsche Bank AG, London Branch.

The bank priced $10 million of securities due Oct. 20, 2011 linked to the Dow Jones - UBS Commodity Index Total Return, according to a 424B2 filing with the Securities and Exchange Commission.

Interest equals one-month Libor minus 16 basis points and is payable monthly.

The securities are putable at any time subject to a minimum of $1 million principal amount and 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 TBill return minus the adjustment factor.

The TBill return will be the sum of the 91-day weekly auction high rates for U.S. Treasury bills for each day during the life of the securities. The adjustment factor will be the greater of 0.25% per year and a flat rate of 0.01%.

Deutsche Bank Securities Inc. and Deutsche Bank Trust Co. Americas were the agents.

Jeremy Berman, managing partner of structured products-focused hedge fund Wavecrest Asset Management, said he has been looking more actively into commodity product options recently.

"There are some opportunities to play in emerging markets," he said.

Commodities are always on the radar for Berman, who said they are a useful component in portfolios because of their potential to be hedges.

"We always look at commodities," Berman said. "It doesn't necessarily mean that we make trades, but the reasons for owning commodities in a portfolio haven't changed. They're a diversifier in terms of non-correlated exposure. ... There are some attractive risk-and-reward possibilities in commodities."

Bears get geared

Amid all the bullish products linked to the S&P 500 index, Eksportfinans went against the grain and offered a product that was not just bearish but leveraged as well.

Eksportfinans priced $22.25 million of 0% bear Accelerated Return Notes due Dec. 14, 2010 linked to the S&P 500 index via underwriter Merrill Lynch, Pierce, Fenner & Smith Inc., according to a 424B2 filing with the SEC.

If the final index level is less than the initial level, the payout at maturity will be par of $10 plus 5% for every 1% that the index declines, subject to a maximum return of 8.1%. If the final index level is greater than the initial level, investors will lose 1% for every 1% that the index advances.

The product was the largest offering of the week after the GT Solar exchangeable deal, suggesting that Eksportfinans and Merrill Lynch found an untapped demand.

"There are some advantages to being the only one selling a particular product," the structurer said.

The structurer said most equity-linked products at the moment are bullish because that is what investors have been asking for.

"I think the medium- to long-term view of the stock market is generally positive at this time, and that's reflected in the type of products being offered," the structurer said. "The banks don't have a lot of incentive to go through the trouble of offering a product if nobody wants it."

But short-maturity bear products, while risky, can allow some investors to adjust for short-term changes in the markets.

"I may have a bullish product that's coming due in three months, but because the market's not doing as well right now, I can look for a bear product with some leverage and hedge my exposure on the downside," the structurer said.

UBS tops

UBS was the top agent for the week ended Friday. It brought approximately $134 million of notes in 11 deals for a 56.96% market share.

UBS was followed by JPMorgan with approximately $28 million sold in 11 deals, or 12.10% of the market. Merrill Lynch's $22.25 million issue of bear Accelerated Return Notes sold for Eksportfinans gave it a 9.47% share of the market and the No. 3 spot.

Goldman Sachs and RBC rounded out the top five in the No. 4 and No. 5 slots, respectively.

"Overall, it was just a very quiet week for the markets." - A structurer

"The reasons for owning commodities in a portfolio haven't changed. They're a diversifier in terms of non-correlated exposure." - Jeremy Berman, managing partner of structured products-focused hedge fund Wavecrest Asset Management

© 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.