Bloomberg News

Average Structured Note Sale Jumps 26% as Distribution Expands

June 16, 2011

June 16 (Bloomberg) -- The size of the average structured note offering in the U.S. grew 26 percent this year as issuers expand distribution channels and investors favor simpler notes.

The average sale was $7.82 million through the first five months of 2011, compared with $6.21 million a year earlier, according to data compiled by Bloomberg from prospectuses filed with the U.S. Securities and Exchange commission. New York-based Citigroup Inc.’s average more than tripled to $27.2 million from $8.87 million.

Issuers now offer notes through more distributors, and investors are diversifying their credit risk with less complex notes that often sell in larger amounts, both of which may have helped increase deal sizes, said Randy Pegg, head of distribution of structured products at Advisors Asset Management Inc.

“You have a more plain-vanilla type approach,” Pegg said in a telephone interview. “Issuers want to make sure when they bring something to market it’s going to be relevant and serve an investment purpose, whereas a couple of years ago, you had more of the quant people coming up with creative ideas.”

The average structured note issued by the Royal Bank of Scotland Group Plc jumped to $3.02 million from $433,092, Bloomberg data show. The Edinburgh-based bank has been offering more products to larger broker-dealers, said Michael Nelskyla, head of investor products for the Americas, who focuses on structured notes for individual investors.

Narrowed Focus

“Historically, we were offering products to distributors who were primarily interested in reverse convertibles,” Nelskyla said in a telephone interview, “We have narrowed our focus on the broker-dealers we work with, and that has resulted in us growing relationships with bigger distributors.”

Low interest rates may have helped bolster the size of new issues as investors look for higher fixed coupons, said Glenn Lotenberg, managing director at Incapital LLC. Sales of callable step-up notes, which pay fixed rates that increase after a predetermined time, have risen 26 percent.

“Callable step-up notes are in vogue, and the deal sizes are quite large,” Lotenberg said in a telephone interview from his office in Boca Raton, Florida. Fixed-income products are selling better than equity-, commodity- and currency-linked notes, he said.

The average callable step-up note offering from Goldman Sachs Group Inc. has increased almost fourfold to $39.5 million from $10.6 million in the first five months of 2011, Bloomberg data show.

Banks sold $3.76 billion of structured notes last month, up from $3.13 billion in April, the data show. Sales have risen more than 19 percent to $21.6 billion this year, up from $18.2 billion a year earlier.

Structured notes are securities created by banks, which package debt with derivatives to offer customized bets to investors while earning fees and raising money. Derivatives are contracts whose value is derived from stocks, bonds, currencies and commodities.

--Editors: Richard Bedard, Mitchell Martin

To contact the reporter on this story: Matt Robinson in New York at mrobinson55@bloomberg.net.

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net.


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