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Bankers Sees Structured-Note Market Getting Busier

Activity in the structured-note market slowed significantly over the past two years as the yield curve flattened and some big corporate issuers, such as the domestic auto companies, were shut out of the retail market by their declining credit quality. However, a number of bankers told attendees at the SVIA’s annual forum in Washington, D.C., that the market is showing signs of becoming more active.

Structured notes are securities featuring embedded puts or calls that cause their return to vary with changes in interest rates or some other index. Issuers have strong incentives to participate in the market when they can. Jeffrey Barany, an executive director with investment bank Morgan Stanley, where he heads the Americas Multi-Asset Class Structured Notes Group, estimated that corporate issuers will capture approximately $50 million in interest rate savings this year by issuing a projected $18 billion in structured notes.

Dave Bradley, a vice president with investment bank Bear Stearns & Co., noted that some of the slack created by the absence of domestic automakers from the retail marketplace this year was taken up by Toyota Motor Corp., which issued about $600 million in notes. Next year, he said, he expects Toyota to issue more than $1 billion in retail notes, perhaps as much as $2 billion. He also foresees insurance companies continuing to be strong players in the retail market, accounting for as much as 20 percent of new issuance next year.

Assessing the demand for structured notes, Robin Budd, senior vice president with Wachovia Securities, said investor uncertainty over the outlook for interest rates appears to be sparking new demand. When the outlook for rates is uncertain, she said, investors develop a bigger appetite for capital preservation, which structured notes can provide.

While retail investors continue to be interested predominantly in notes from brand-name sellers, Barany said institutional investors are becoming more comfortable investing in structured notes from a wide variety of issuers. Three to four years ago, he said, many were only comfortable buying notes from government-sponsored entities because they didn’t want to couple credit risk with interest rate risk. Today, they’re willing to buy not only from brand-name corporate issuers, but also from lesser known corporate issuers.

In general, Budd said, retail investors are less concerned about the overall size of the issue in which they are investing and more concerned that, should they want to sell before their notes mature, they will have access to a liquid secondary market. High-net-worth retail investors, she added, are starting to buy more esoteric structured notes, including commodity-linked and equity-structured notes, as opposed to plain vanilla deals.

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