JP Morgan remains top but loses fee share

Cornerstone investor tranches appear to finally be taking hold in European ECM, years after the process of anchoring IPOs around a clutch of major investors became the dominant model in Asia. Close to half of incubator Rocket Internet’s IPO, which launched bookbuilding last week, is set to go to a group of six investors. The proportion is nearer a quarter on Zalando’s IPO, launched a week before that. Both deals got a strong welcome from investors, with Rocket covered at the maximum price inside an hour – no doubt helped by the momentum that comes from the involvement of cornerstones. A handful of REIT IPOs earlier this year have included cornerstones, but these are the easiest names with which to attract such committed investors. Pricing is fixed before launch, and being locked-up for a year is a minor issue for those buying into a yield play that needs time to invest proceeds. Similarly, the cornerstone involvement in Euronext’s IPO in June might not provide a read-across to the wider market, because those investors were all financial institutions there to accelerate InterContinental Exchange’s forced exit from the European stock exchange operator. But Zalando and Rocket have now taken things further, using cornerstones as a springboard to boost confidence in the valuation ascribed to complex internet-related businesses. In the US a clearer peer group would perhaps have made such committed buyers unnecessary, but with both companies listing in Frankfurt – and Rocket on the junior market – having guaranteed orders in place was deemed beneficial. European ECM bankers are still shy of calling this a trend – nervous, possibly, about how cornerstone tranches have come to define Asian offerings, often for the worse. They are right to be concerned. Thanks to the dominance of cornerstones, ECM mandates in Asia are now reverse-engineered. Banks do not win senior roles because they are expected to attract the most orders; those that have brought in the cornerstone demand are given the top slots – often regardless of their qualifications when it comes to the nitty-gritty of ECM. One result is that the message is clear if a major Asian IPO launches without any cornerstones: big, canny investors don’t like the company/deal/valuation – and only a fool would second-guess them. WH Group is the most recent victim of this thinking. Another is that Asian listings can feel like a carve-up of stock between well-connected investors (often “family and friends” of the company being listed) rather true initial public offerings. Sourcing guaranteed demand at top-end pricing is a powerful tool – and will often be appropriate. But it is not a panacea and should be cautiously employed. Another fine mess Why do banks insist on doing business in India for nothing? Equity capital markets bankers have moaned for years that they work on Indian share placements for free, and it seems their equity-linked colleagues are determined to do the same. Larsen & Toubro, one of the country’s top blue-chip stocks, drove a hard bargain on last week’s US$200m convertible bond, resorting to a good, old-fashioned bake-off to squeeze the best possible terms out of its underwriters. It ended up with a 0.675% coupon and a conversion premium of 25%. But the three leads immediately offered the bonds into the market at a discount, apparently well aware that the deal would struggle to clear. Two days later the bonds were still on offer – and further below par. L&T certainly got a good deal, but it’s hard to see how this strategy did the banks any favours. Buying market share is one thing, but the loss-leader approach only works if you can charge more in the future or on some other product. Faced with India’s notoriously thrifty issuers, it’s not at all clear that will be the case. State-owned India is accustomed to having banks fall over themselves for a pittance. There are tales that ministers even had to insist on a floor price of one rupee for state share offerings afte

Swiss chocolate maker Lindt’s acquisition finance-led bumper triple-trancher last Wednesday was the standout deal of the week, if not one of the top deals of the year. Despite a lack of formal ratings and as quasi-debut name, the company capitalised on its impressive name recognition to become a “must-buy” for every fund in the country. Swiss confectioner Chocoladefabriken Lindt & Sprüngli AG, unrated by the international agencies but rated high A by Credit Suisse and A by UBS (both stable), is not a new name in its home market. It has brought deals before – small, mostly private placements in 1993, 1998 and 2000, in sizes from SFr20m to SFr100m. All of those deals had matured long before the new deal came. Lindt had a swift roadshow in Zurich and Geneva on September 22. The meetings were well-attended, and potential investors walked away with not only a better understanding of the company’s updated profile, but also a kilogram of fine chocolate each, according to one fund manager who was present. Credit Suisse and UBS were joint leads, with UBS being joint bookrunner on the FRN, and Credit Suisse as sole books on the longer fixed-rate tranches. Following the meetings, the leads performed a quick feasibility check for a three-year FRN at 3mL+15-18bp, a six-year fixed at mid-swaps plus 15–20bp and a 10-year at plus 23–28bp. Investors responded well, although there was a bit of resistance on pricing for the three-year, and books opened on a triple tranche minimum SFr800m deal. A SFr150m minimum three-year FRN was marketed at the wide end, at 3mL+18bp area. A minimum SFr400m six-year at mid-swaps plus 15bp area (Govt +32.6bp area/ Ind Yield 0.482%, expected coupon 0.5%), and a SFr250m 1% 10-year at mid-swaps plus 23bp area (Govt +55.1bp area / Ind Yield 1.045%). Books closed at 10:45 CET for pricing. It was timed well, coming just as the benchmark five-year swap rate dipped below 0.2% for the first time. Final terms saw a total of SFr1bn printing, with all three tranches pricing in line with their “area” guidance. The three-year FRN came in SFr250m in size at par, with a 3mL+18bp coupon. The six-year hit SFr500m with a 0.5% coupon, at plus 15bp, it came with a 0.492% yield or Swiss governments plus 32.5bp. The SFr250m 1% 10-year came at mid-swaps plus 23bp, or 1.045%, equivalent to governments plus 54.1bp. Books were described as “manageably oversubscribed” by a lead official, at around two times subscribed, with over 150 investors taking part, placing nearly 250 orders. Too rich for some Distribution was predictably wide, although like some of the company’s more exotic confections, the paper was a bit rich for some investors. Private banking clients, for instance, generally need more than a 1% yield to make a bond worthwhile to own. They also generally prefer shorter tenors than 10 years. The FRN saw 45 accounts take average tickets of around SFr5.5m. Private banks bought 38%, bank treasuries 37%, pension funds 16%, asset managers 5% and insurers 4%. The six-year had 99 accounts for an average SFr5.05m ticket. Asset managers took 29%, private banks 28%, treasuries 26%, pension funds 9% and insurers 8%. The 10-year went to 95 accounts receiving an average SFr2.6m allotment. Asset managers took 31%, pension funds 23%, treasuries 18%, insurers 16% and private banks 12%. The bond was a rare Swiss market acquisition financing trade, brought to help purchase US candy maker and retailer Russell Stover Candies, LLC, USA. The buyout was announced in mid-July. A syndicate banker unconnected to the deal said that despite the obvious attraction of the trade to the vast majority of the Swiss investor base, due to its rarity value and strong credit profile, it still was not an “easy deal”. He cited the uncertainty surrounding the pricing of what was almost a debut transaction, where the organisers want to get a good deal for the issuer, but also want to keep investors enthused. Even a slight mis-step can lead to a deal – even one as obvio

General Motors Financial was one of the best picks of the week, issuing a Ba1/BB–/BB+ offering of US$750m three-year and US$1.25bn of seven-year notes just days before it and its auto parent made their way back to investment grade by S&P. The surprise upgrade to BBB– sent its new US$750m 3.00% three-year notes in to 141bp over Treasuries, from pricing of 194bp and to a dollar price of 101.25. Its US$1.25bn of 4.375% 2021 seven-year securities surged to 102.25 in dollar price and tightened in to 166.5bp from a new-issue spread of 212bp. The deal was originally whispered at 3.125% and mid-4% area for the three and the seven-year respectively, by Deutsche Bank, BBI, Goldman Sachs, Lloyds and Morgan Stanley. They were eventually priced at 3.00% and 4.375%. ING Group also did well with its US$1.15bn 2.5% five-year and US$350m five-year floating rate note, led by BNP Paribas, Citigroup, Deutsche Bank, HSBC and ING. The deal attracted US$2.35bn of demand and at the T+85bp pricing the five-year was sold with a 1bp new-issue concession. Santander’s UK arm, Abbey National Treasury, returned to the Yankee market for the second time this month and the third time this year with a US$500m of 1.65% three year senior unsecured, at T+62.5bp and US$250m of three year floaters at 41bp over Libor. The book size was underwhelming at US$1bn for a US$750m deal, after Abbey pulled in pricing from IPTs in the mid to high 60s range, but at 62.5bp it came flat to comparables.

Swiss drugmaker Roche stole the limelight last week with a US$5.75bn six-tranche financing for its US$8.3bn acquisition of US biotechnology company, InterMune. Roche’s deal was flooded with US$13bn of demand at the peak (US$12.5bn total). The issuer’s A1/AA/AA ratings helped, as did its rarity value as this was its first deal in five years. The corporate also offered good liquidity in attractive parts of the curve and its acquisition is viewed positively. The pharmaceutical company pulled in pricing by 5–13bp across the tranches from initial price thoughts to launch, and left 5bp of new-issue concession across the tranches, when its 10-year pricing is compared with peers like Novartis. The US$850m three-year priced at 30bp from whispers of 35–40bp; US$300m of three-year floaters at 3mL+9bp; US$1.5bn of five-year fixed at 50bp from whispers of 60bp area; US$500m of five-year floaters at 3mL+34bp; US$1.3bn of seven-year notes at 67bp from 80bp IPTs and US$1.3bn of 10-year securities at 82bp, from whispers of 95bp area. Sysco Corporation followed just 24 hours later with its own US$5bn of acquisition financing, a deal offered at such attractive initial price thought levels that active bookrunners Goldman Sachs, JP Morgan, TD Securities and Wells Fargo Securities pulled in more than US$20bn of demand for the six-tranche trade. Needing to overcome investor worries about anti-trust concerns surrounding its purchase of US Foods, not to mention the large size of the deal on the heels of Roche, Sysco needed to start out with eye-popping new-issue concessions at the IPT stage. Sysco’s offering of three, five, seven, 10, 20 and 30-year tranches based pricing on the 10-year, which offered about 20–30bp of new-issue concession at its 115bp–120bp whispers. That was whittled down to 102bp or 7–12bp of concession by the time Sysco priced and spreads at launch for the other tranches were built up and down from there, based on the credit curve differentials. Ultimately Sysco issued US$500m of 1.45% October 2017s at 42bp over Treasuries; US$750m of 2.35% 2019s at 62bp; US$750m of 3.00% 2021s at 82bp; US$1.25bn 3.5% 2024s at 102bp; US$750m of 4.35% 2034s at 112bp and US$1bn 4.5% 2044s at 132bp. Thomson Reuters also offered some concession on US$550m of 1.65% three-year notes maturing September 2017 at 65bp over Treasuries versus a 75bp–85bp whispered level, as well as US$450m 3.85% September 2024 10-year notes at 135bp, 15bp tighter than initial price thoughts. Bookrunners built a book of US$3bn for the deal, after offering investors good reason to participate. At 65bp the three-year offered a 5bp new-issue concession and at 135bp the 10-year gave investors a 7bp pickup to comparables. Jeweller Tiffany & Co’s debut offering received a huge response, with bookrunners BofA Merrill, Bank of New York, GS, JP Morgan and Mizuho receiving US$3.6bn of demand for the US$550m 10 and 30-year notes. The Baa2/BBB+/A– rated deal was split into US$250m of 2.8% 10-year notes maturing in October 2024, priced at 128bp, versus whispers of 145–150bp and US$300m of 4.9% 30-year bonds maturing October 2044 at 165bp from initial price thoughts 30bp wider than the 10-year.

High-yield bankers estimate up to US$60bn in high-yield supply from now until the end of the year, starting with a sizeable US$1.25bn eight-year NC3 senior note expected this week for Zebra Technologies. Those positive estimates come as Lipper reported that the asset class saw a net inflow of US$528m for the week ended on Wednesday – a welcome change after US$2.15bn of net redemptions in the three weeks before that. But after the high-yield market’s ninth-busiest week of 2014, with more than US$9.7bn priced through Thursday, investors said the supply calendar for the last quarter of the year would depend heavily on market conditions. With the Fed finally ready to wind down QE next month, “People are trying to determine valuation levels as we move into a new environment,” one investor said. Other sizeable trades expected to emerge soon include power company Dynegy Inc and Scientific Games. Dynegy is looking to raise US$5bn from new unsecured bonds to partly finance the acquisition of coal and plants from Duke Energy and Energy Capital Partners (ECP). Scientific Games International could raise as much as US$3.45bn from secured and unsecured bonds to partly fund its takeover of Bally Technologies, though one source said the issuer may just opt for unsecured bonds if the accompanying loan goes well. Like other asset classes, the high-yield space got a bit of a surprise on Friday when Pimco announced the departure of Bill Gross for Janus Capital. “The market got sloppy when that news came out, with high-yield [index] dropping by half a point to 105.5 from the 106.00 close [Thursday],” one trader said. “People are concerned there could be liquidation.” One of last week’s biggest prints – Burger King’s US$2.25bn new 7.5-year – was bid lower on the day at 98.75, having opened at 99.5–100.00 before Gross’s news was out. General Cable, which announced a US$250m five-year NCL senior notes offering through JP Morgan was due to be priced last Friday or if not this week. The last day of the week saw just one deal announcement, for Halyard Health Inc, a wholly owned subsidiary of Kimberly-Clark. The financing is in preparation for its spin-off at the end of October 2014. The Ba3/BB issuer announced a US$250m senior note offering through Morgan Stanley. An investor call comes on Monday, with pricing scheduled this week. Barcode company Zebra Technologies Corp is also expected to price a US$1.25bn eight-year M&A deal. Zebra is buying Motorola Solutions Inc’s enterprise business, which makes rugged mobile computers, tablets and barcode scanners, in an all-cash transaction of US$3.45bn. Also in the high-yield pipeline is information technology company CGI Group Inc, which is targeting a large US$855m four-tranche senior unsecured note offering in euros and dollars.

The power just one man can wield in the fixed-income markets was demonstrated on Friday, when news that PIMCO co-founder and CIO, Bill Gross, was leaving to join Janus Capital Group sent several debt asset classes reeling, including high-grade corporate bonds. The IG CDX 22 index gapped out 3bp on the move to 65.25bp on Friday – a huge move for the index - on expectations by some analysts that the US$220bn total return fund managed by Gross could lose as much as a third of its funds because of his departure. “We expect asset outflows in the order of 10% to 30%,” said Thomas Seidl, equity insurance analyst at Bernstein Research. “We would expect a good deal of PIMCO clients switching to Janus, simply attracted by the long track record of Bill Gross,” he and his team wrote in a research report. Pressure on corporate bonds was generally across the board, although it was heard that traders were hitting positions that Gross held in large size in his total return fund. Gross Factor Bond underwriters were fretting that, coupled with the recent equity volatility and the looming non-farm payroll report in the week ahead, the ‘Gross Factor’ could lead to bigger new-issue concessions paid by borrowers pencilled in for issuance in the week ahead. “We are expecting about US$20bn–$25bn of new issuance in the week ahead, skewed toward corporates, but who knows what the market will be like on Monday,” said one syndicate manager. That deal volume includes another jumbo acquisition financing, according to sources, on top of the US$11.7bn worth of M&A related bond issuance in the past week. With earnings blackout season approaching in mid-October, issuers could be inclined to bite the bullet and get their needed financings out of the way. “It’s not like this money will be pulled out of PIMCO and stuffed under people’s mattresses,” said one syndicate manager. “It will presumably go back into the market and will only have a temporary impact.” Even so, it’s a blight on a market that is already seeing anxiety increasing around the ability of the Fed to manage a smooth transition from a low rate environment to a higher one. The need to be compensated for possible volatility and illiquidity, along with sheer buyside exhaustion from the US$126bn issued in September so far, required borrowers in the past week to leave some spread on the table. “There is fatigue in the market,” said Andrew Karp, head of investment grade bond syndicate for the Americas at Bank of America Merrill Lynch. “The increase in supply this month has created some indigestion on the buyside.” “Investors still have plenty of money to spend, but I do think their price discipline has increased. They feel they are able to be choosier in deciding what they will participate in and if they don’t get what they want they feel they can sit it out.” Of the US$24.357bn issued in the past week, US$11.7bn came from three large deals related to recent acquisitions by Roche, Suntory and Sysco Corp.

Obvion printed its new RMBS a week before what could be a major event for the European ABS market. But the deal surprised some market participants, which questioned whether the Dutch issuer could have waited until details about the ECB asset purchase plan hit the market, and ride any tightening that might ensue.  But Obvion was just sticking to its tried and tested routine with Storm 2014-III in what ended up being the tightest print in this sector since the financial crisis.  “This deal was planned as usual, where we issue mostly before and after the summer. Market conditions were good and so we went ahead with the transaction,” said Rachelle Rijk, head of funding and risk management at Obvion. “We didn’t consider any additional impact from the ECB announcement as it is uncertain what the impact will be, so we trusted the strength of the programme and investor demand.” Market sentiment is very positive at the moment with all products rallying – whether they may be eligible for purchase or not. But with little publicly marketed Dutch issuance in the past few quarters, it meant judging how close to get to secondary market quotes for price talk.  Lead managers Citigroup and Rabobank began fairly cautiously, starting at three-month Euribor plus 30bp–35bp for the 1.9-year Class A1 and 40bp–45bp for the five-year Class A2 respectively. Obvion was aiming for a deal of €1bn, but did not publish tranche sizes until later in the process.   Given that some Storm 2014-II paper had traded in the mid 30bp area the previous week, it appeared to be an opportunity for investors to grab some paper at a discount to secondary. The leads then tested tighter levels and cut 5bp off both tranches. Few accounts dropped out, and one lead said that certain investors were willing to drop their minimum spread limits to stay in the deal. A book update at price guidance showed over €600m and in excess of €1.4bn for the two notes, encouraging Obvion to print at the tight end and up the deal to the maximum €1.2bn size that the portfolio could support.  This was split across €258m of Class A1 bonds at 25bp and €942m of Class A2 at 35bp in a successful exercise. The tranches were 2.4 times and 1.6 times subscribed respectively. “We had to look at how the market would react as it is one of the first public Dutch RMBS transactions in a few months. In the end, the deal priced flat to the bid side of the secondary market. It was the right level,” said Rijk.   The interest was reflected in a diverse order book with around 50 accounts across both tranches.  The Class A1 was placed 27% in the UK, 24% France, 14% the Benelux region, 6% Africa, 3% Germany, 2% Southern Europe, 9% elsewhere in Europe and 15% other. By type, banks/private banks bought 43%, fund managers 32%, official institutions 22% and pension/insurance 3%.  The Class A2 was sold 32% in the UK, 18% Germany, 17% the Benelux region, 4% France, 1% Southern Europe, 4% other Europe and 24% other. By type, banks/private banks bought 52%, official institutions 24%, fund managers 19% and pension/insurance 5%.

I’m feeling a bit dejected. And I’m not alone. Most of us in the fixed income and credit broking community are ranging from depressed to near suicidal – and, truth be told, not entirely without reason. It is hardly a secret that brokers are generally struggling at the moment. Volumes are down and regulation is up. Best execution and electronic trading platforms are bad enough for business, without near-invisible volatility and record low rates making life even harder. Most of us have expressed our doubts about the environment that is being created, but it was having the line pulled by one of my larger clients that really made me look at the world out there. The CEO is a private finance specialist, the CIO comes out of equities, the head of fixed income has a background in treasury and running liquidity funds and only the fourth down the chain of command is a credit fixed income specialist. He, evidently, was the only one who really understood why we might have been essential to the work he does. MAKING MONEY IN bonds is as much about locking in relative value as it is about the fundamental credit call. Relative value does not exist in equities (other than maybe in the likes of Shell with its dual listing): BP is BP is BP. In the “old days” firms would look for relative value trades, put them on the book and then try to pass them on to the investing clients. Those days are sadly gone. Salespeople spend most of their time flogging new issues and traders, if they find a relative value trade with a bit of juice in it, will certainly not be giving that to a customer. Altruism is not a word that appears in the Lexicon of Investment Banking Terminology. Not that brokers have altruism in their DNA either – they are largely superannuated investment bankers themselves. But what they do bring in most cases is a vast range of experience and a thumping Rolodex. There is a reason why people get bounced off the trading floor when they hit 50. It is because they have too much experience, because they know too much. They have done their time as distribution cannon fodder and have matured enough to know when to say “No!” Banks don’t want or need that. They have been around for long enough to know that acting in the clients’ interests belongs in the same category as the cheque being in the mail. Banks may not need them – but investors do. Altruism is not a word that appears in the Lexicon of Investment Banking Terminology INDEPENDENT BROKERS HAVE no axes to grind and, as they don’t enjoy the privilege of allocating new issues, don’t hold investors firmly by the neck. Clients owe them nothing other than the margin they charge for sharing their knowledge, their experience and their services. Best execution not only takes no account of this; it firmly outlaws it. Talk of sinking the ship for a ha’penth of tar. Indeed, “best ex” is fine and dandy but as my senior partner once commented, no trading platform has ever generated an idea. It is the ideas that produce excess return, not the odd cent or penny that is skimmed off the trading price. If the thought-process is correct, then the price should not make or break a relationship. Small brokerages like our own spend their time scouring the world for relative value ideas or otherwise undervalued paper. The reason it is cheap is because it can’t find a buyer and it can’t find a buyer because the investor to whom it may appeal hasn’t seen it. We take the time to explain why we like it and why we think it makes sense to take it down. Some we win, some we lose. My fourth in the line of command portfolio manager appreciates this but his towering hierarchy misses the point, so he in turn misses the value that we added to his returns. UNTIL THE CITY of London was visited by the Big Bang in 1986, market-making and broking were strictly separated and, some of those who lost their shirts in 2007/2008 might conclude, with good reason. The conflicts of interest which exist within an investment bank very rarely se

Swiss provider of financial services Cembra Money Bank (A– by S&P) came on Tuesday with a dual-tranche deal, taking advantage of historically low interest rates. It mandated Credit Suisse and Deutsche Bank to lead a quick roadshow on Monday, and books opened Tuesday morning for a SFr100m minimum 0.75% (expected) five-year senior due 14 October 2019 at mid-swaps plus 53bp area, and a minimum SFr100m eight-year 1.25% due 14 October 2022 at mid-swaps plus 68bp area. Books quickly reached full subscription and were closed, with pricing in line with guidance, both in SFr100m. More than 50 accounts took part over the two tranches. The five-year saw interest from asset managers with around 44%, while banks took 32%, insurers 12%, private banks/retail 9% and pension funds 3%. The longer tranche saw banks take 42%, asset managers 33%, insurers 18%, private banks/retail 5% and pension funds 2%. The old GE Money Bank had only brought senior paper once before, a SFr250m 1.125% November 2017, originally as a four-year from November 2013. The new bonds flesh out and extend Cembra’s fledgling curve. Both tranches widened slightly in the secondary market.

Systematic strategies that capture the volatility risk premium are gaining traction across alternative asset classes as investors embrace new index products that replicate the well-established equity volatility carry trade on a range of commodity underlying indicators. Across most asset classes implied volatility – the measure of expected future price swings derived from options prices – typically trades higher than realised volatility. Investors are able to monetise the spread by systematically selling implied vol through a range of instruments including options, variance swaps and volatility swaps. Efforts to package the strategy in systematic indices first got under way in equity markets with products like JP Morgan’s Volemont and have since extended to alternative assets such as foreign exchange and gold, allowing investors to take a multi-asset approach (see “JPM expands vol carry strategy”). “Interest is growing, along with the ‘risk premium’ approach to investing,” said Stephane Audran, global head of commodities investor products trading at JP Morgan. “Volatility carry as a theme exists across asset classes. Historical data illustrate the fact that the market may pay a premium for protection against occasional sharp rises in volatility. Investors can harvest this premium through strategies aiming to capture the implied versus realised spread.” Now the focus has shifted to commodity markets, where volatility trading has been on the rise over the last two years in response to the return of fundamental price drivers and a range of geopolitical events (see “Commodity vol to get systematic boost”). “The big theme for commodities has been volatility,” said Alexandre Cosquer, global head of cross-asset commodity markets at SG. ”We’ve seen a big increase in vol trades this year as there are more stories and there has been a big pick-up in variance swaps. We’re having more conversations and seeing more RFQs.” Highlighting the renewed interest, over the past 12 months the CBOE’s Gold Volatility Index, which applies VIX methodology to options on the SPDR Gold Shares ETF, has ranged between 13 and 26. By comparison, the VIX index of S&P 500 options volatility has traded in a narrower 11 to 21 range. “More investors are getting access to the volatility space. Variance swaps are very widely traded in other asset classes, but they’re relatively new in commodities. A lot of multi-asset clients want to add commodity volatility indices to their risk factor portfolios,” said Cosquer. Systematic approach While most hedge funds are comfortable trading over-the-counter variance swaps to take a view on volatility, many institutional investors are seeking exposure through swaps and certificates linked to index products that extract the implied volatility premium in a systematic manner. “We are seeing a lot of interest from institutional investors globally looking to trade the commodity volatility market in a transparent and liquid manner, leveraging JP Morgan’s technology and risk management capabilities to implement these sophisticated strategies,” said Audran. The US dealer offers the strategy across an array of commodity underlying asset and continues to broaden the range as demand spreads to additional assets. Last year, the firm launched a Volemont-style index on crude oil that was able to outstrip the disappointing carry from selling volatility on equity, gold and FX markets (see “Oil provides vol carry pick-up”). Such indices can be widely applied across commodities provided that the underlying asset has liquid listed options market. Societe Generale recently launched a range of products applying a volatility carry strategy to crude oil, natural gas and gold – currently gaining significant investor attention – and is in the process of adding other markets including base metals and agricultural commodities such as corn, wheat and soya beans. “Variance swaps offer specialist clients a systematic way of putting in place a pure volatil

JP Morgan is marketing its third super-prime jumbo RMBS deal of the year, but investors could give it a somewhat cool welcome after the poor performance of other trades in the sector. Even though the new US$483m self-led transaction is backed by mortgages to high-quality borrowers, some in the market are anxious about what they say are problems across the asset class. As one hedge fund investor who has bought Redwood Trust jumbo deals put it: “We participated in a number of the earlier Sequoia deals last year – and got burned on them.” In addition, JP Morgan’s new deal – dubbed JPMMT 2014-IVR3 and backed by 551 loans – is relatively weak on representations and warranties framework, DBRS rating agency said in a report. RMBS investors have had a rocky ride since the first half of last year, as some prime bonds issued at par back then fell as low as 92 earlier this year, according to JP Morgan’s data. An unexpected spike in interest rates meant that fewer borrowers paid off their loans early, sending what’s known as the “conditional prepayment rate” (CPR) down to 4% from 13%. That was bad news for bondholders expecting to get repaid sooner rather than later. Even so, JP Morgan is going ahead with the new US$483.56m trade, which has a moderately low overall loan-to-value ratio of 68.7% and a high weighted average FICO score of 764. It was expected to price on Monday, with current indications putting the US$35.151m Class 1-A-1 almost fully subscribed at swaps plus 80np–85bp, the US$241.716m 2-A-1 around 85% covered at 105bp–115bp, the US$134.159m 3-A-1 around 30% subscribed at 115bp–125bp, and the US$26.839m A-M 40% covered at 125bp–130bp. The issuer has already sold two similar issues this year – a US$273.373m trade in late June and a US$373m issue that priced in late January, according to IFR data. As with those two, the latest transaction has diminished protections due to a provision that allows the bank’s liability to representations and warrants to “sunset”, DBRS said. That means they disappear anywhere from three to six years after the bond’s settlement date, leaving bondholders with little recourse after that period. Interestingly, the new trade is coming to market just as a high-profile court case involving representations and warranties on pre-crisis RMBS is being worked out in the courts. The case, involving the ACE 2006-SL2 trust against DB Structured Products – commonly referred to as ACE II – is scheduled to wrap up briefs by October 28, according to court filings. If the plaintiffs convince the highest appeal court in New York to side with their interpretation of the statute of limitations, several legacy RMBS trusts would suddenly be reopened to put-back litigation from investors. The oral arguments would then proceed for another two to three months, said an attorney closely following the case. Bondholders could eventually force Deutsche Bank, the mortgage originator, to either repurchase the loans or settle with investors.

The week saw SFr2.996bn price, making it the biggest week in 20 months, since mid-January 2013 which saw a massive SFr3.33bn print. ICBC Sydney debuted and Hyundai Capital brought a dual tranche. As well, PSHypo brought a triple trancher in 2021, 2026 and 2032 totalling SFr681m, and Psychiatrische Dienste Aargau AG did a SFr60m eight-year through ZKB. Looking forward, Helvetia Group mandated UBS Investment Bank as structuring adviser and bookrunner, Credit Suisse and Deutsche Bank as joint-lead managers and Raiffeisen Schweiz and Bank Vontobel as senior co-managers for a potential Swiss franc denominated subordinated bond offering to be launched following a series of investor meetings in Switzerland starting on Tuesday, September 30, subject to market conditions.