US MTNs: a glass half full?

  • 30 May 2007
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While conditions in the structured MTN market in Europe have been challenging for issuers and dealers, growth in the US market is enticing more participants to look across the Atlantic. But with institutional buyers largely absent, has the market lived up to expectations for those who have taken the plunge? Nick Jacob reports.

Though the US MTN market gets a lot of attention, the market is made up of several different sectors — equity and fixed income, retail and institutional — each of which is developing in its own way.

While the retail sector is booming on the back of rising share prices and high implied volatility creating perfect conditions for structured note sales by big Wall Street firms, the institutional and fixed income sectors are lagging behind.

Goldman Sachs’ head of MTNs, Marko Milos, says that sales are skewed to a particular segment of the market which dealers are taking advantage of.

"We’re seeing equity and FX plays for retail and private wealth clients, with rate product targeted towards bank buyers," he notes. "The institutional element is, however, still down compared to what we see in Europe and this is where the potential lies."

The US houses — Citi, Goldman Sachs, Merrill Lynch, Morgan Stanley, Bear Stearns, LaSalle and others — have the advantage in retail because of SEC rules on sales to individuals. To sell to retail, an issuer must have a fully SEC-registered programme, and for European issuers that is a big headache from a documentation, accounting and legal perspective. For instance, when Deutsche Bank launched its SEC-registered programme at the end of 2006, it came on the back of over a year’s work.

However, sales to qualified investors are easier with a 3a2 registration — the route that BNP Paribas, for instance, has taken — while a relatively simple 144A clause inserted into an EMTN programme allows sales to the largest institutional investors.

While Jeffrey Barany, Morgan Stanley’s head of US structured notes and global dollar interest rate derivatives in New York, says that institutional demand — including that for agency paper — is apparent, he also notes the strength of equity-linked demand from retail investors.

"Equity-linked structures are driving the retail structured products business at the moment," he says. "The majority of investment dollars that go into retail structures are equity-linked and that is reflective of US retail being an equity culture, and the thriving equity markets are helping."

Higher levels of implied volatility in equity markets give structurers the flexibility to create a variety of products with attractive risk/reward payoffs, he says.

"With interest rate volatilities at or on their lows, you can’t say the same is true."

This focus on retail — equity-linked, dealer own-name paper — leaves little up for grabs for third party issuers. For that, the market needs institutions to be buying the sorts of interest rate structures that are the backbone of the Euromarket structures business — range accruals, inverse floaters and curve steepeners, for instance.

Barany says that there are institutions involved in every asset class in meaningful ways, including this interest rate-linked sector. "Every kind of institution is involved in some type of structured note," he says. It might be dealer-led in equities and retail but, "in the fixed income, institutional space, dealers are less frequent".

However, Milos is not so sure. "The retail element is well developed — with dealers trying to leverage as much as they can in their own name — but the institutional element needs to come back."

He also thinks that institutional investors are less educated and knowledgeable about structured products than their European counterparts.

Svensk Exportkredit’s head of funding Richard Anund has also been missing institutional investors from his agency’s structured US debt. The borrower has a fully SEC-registered programme for the advantages it confers its global US dollar bonds, but is rarely asked about structured notes when on marketing tours to institutions. "We don’t see a lot of institutional investors involved," he says. "But since we have the capacity, we try to market our structures and show we are a borrower capable of doing it."

Difficulties for issuers

SEC-registration is an administrative pain for borrowers, even after the programme has been put in place. Svensk Exportkredit, for instance, has had its facility for many years — as a result of its activities in the global bond market, rather than specifically for structured notes — but still finds documenting each issue to be a cumbersome process.

"It is expensive and it is very time-consuming," says Anund. "Our lawyers are frustrated and our accounting department is frustrated because we have to submit all our numbers according to US GAAP."

Eksportfinans, Svensk Exportkredit and KfW are the only European sovereign, supranational and agency borrowers with a fully SEC-registered programme. SEK raises around $1bn a year from structured US MTNs, but even that would not be enough to make the programme cost-effective if it did not also issue global dollar benchmarks. "For us, because we are active in global bonds, we have to do it anyway," says Anund. "We don’t take all the administration expenses on the structured notes, it’s also for the vanilla globals." Having said that, he is content with the performance of the market, saying, "It’s in our strategy to be involved in markets around the world. In our business model we need to be present in the US, and we’re pleased with what it is providing."

Even with only a handful of international borrowers active in the SEC-registered area, there is already enough competition to drive up funding levels available, says Anund. "Competition has increased over the last couple of years. Even if there is not that many borrowers, the market is not that big so with more borrowers coming in it would be even tougher," he says.

However, issuers don’t need a full SEC-registered programme to access institutional demand. Borrowers such as Commonwealth Bank of Australia have been able to print regularly — though in quite small size — with straightforward 144A clauses in their standard programme documents.

"The frequent EMTN issuers are taking the expertise they have developed in Europe and bringing it to the US," says Barany. "They approach the business in a manner in which they want to be as flexible as they can and they tend to view it as a programme rather than one-off trades."

But without sustained demand from institutional investors, the pickings will remain limited, says Goldman’s Milos. "For the time being, the market is going to be limited for third party borrowers until investor interest picks up or issuers change their strategies to look at more complex structures."

The attention banks are now giving to US MTNs is helping to promote structured notes throughout the country. As Barany says, "Everyone involved the process is becoming better educated as to the role of structured products in an individual investors’ portfolio."

Anund echoes that view, seeing more competition from dealers helping to drive the market forward. "More and more dealers are getting involved and developing structuring capabilities in the US so the market will grow over time."

Those banks are betting that the potential of the market will be realised soon as institutional clients start regularly buying structured notes. As Milos says: "There are still a lot of investors that have stayed away from the market for a long time and they are slowly showing signs of returning."

Equity linked MTN Dealer League Table 2007

RankDealerDeal Value $m (Proceeds)No.% Share
3Commerzbank Group3,460.8316610.42
4Société Généralé3,112.661029.37
5Merrill Lynch 2,540.643337.65
7BNP Paribas1,562.961354.71
8Morgan Stanley1,273.46753.83
9Barclays Capital1,209.90453.64
11Mizuho Financial Group Inc862.61172.6
12JP Morgan612.29401.84
13Goldman Sachs 561.63251.69
14Lehman Brothers514.8581.55
15Dexia Capital Markets477.461.44

Equity linked MTN Issuer League Table 2007

RankIssuerDeal Value $m (Proceeds)No.% Share
1UBS AG5,785.2444917.42
2HSBC Holdings plc4,307.6869812.97
3Commerzbank AG3,164.861389.53
4Société Généralé2,886.08908.69
5Merrill Lynch 2,450.883207.38
6BNP Paribas SA1,481.231414.46
7Morgan Stanley1,218.46723.67
8Barclays plc1,136.59353.42
9Citigroup Inc925.27542.79
10Crédit Agricole SA840.95672.53
11Dexia SA810.37172.44
12Allegro Investment Corp745.86892.25
13KBC Group NV741.69732.23
14Fortis Group564.8411.7
15JP Morgan Chase & Co523.45351.58

  • 30 May 2007

All International Bonds

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Citi 29,333.03 101 7.94%
2 JPMorgan 27,208.83 91 7.37%
3 Barclays 23,714.00 55 6.42%
4 Bank of America Merrill Lynch 20,332.10 65 5.50%
5 Goldman Sachs 20,005.21 49 5.42%

Bookrunners of All Syndicated Loans EMEA

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Mizuho 299.85 1 21.73%
1 ING 299.85 1 21.73%
1 Commerzbank Group 299.85 1 21.73%
1 BNP Paribas 299.85 1 21.73%
5 UBS 60.22 1 4.36%

Bookrunners of all EMEA ECM Issuance

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Goldman Sachs 1,607.28 5 23.03%
2 Credit Suisse 1,301.65 4 18.65%
3 UBS 970.80 3 13.91%
4 BNP Paribas 522.35 4 7.49%
5 SG Corporate & Investment Banking 444.17 3 6.37%