Commodities

Structured Products Europe Awards 2007

Amid chaos in other investment markets, commodities have remained broadly bullish on the back of geopolitical instability and ongoing demand from China and India for resources, which has pushed up the prices of precious metals and oil. Investors' appetite for the alternative returns offered by commodities has similarly not abated. One of the banks best placed to take advantage of this trend is Barclays Capital. According to medium-term-note market data provider mtn-i.com, BarCap is by far the biggest provider of commodity-linked notes. As of September, the bank had issued almost $2.5 billion of notes this year, equating to a 34% share of the market. Morgan Stanley came second, issuing $1.4 billion of notes over the same period, and Goldman Sachs third with $550 million of issuance.

But BarCap's success does not rely on scale alone; the bank has also proved itself an innovator. The bank was the first to market with the collateralised commodity obligation (CCO) concept in 2004, for example, when it launched Apollo. Borrowing from the synthetic collateralised debt obligation (CDO) arena, CCOs reference commodity trigger swaps rather than credit default swaps, with trigger events set at particular commodity price levels. The concept proved highly popular, and BarCap has gone on to launch more than 50 issues.

Last year, BarCap came up with the world's first managed CCO, Everest 1, in conjunction with the Los Angeles-based Trust Company of the West. By the end of last year, the bank was issuing CCO mezzanine and equity tranches. This year's innovation has been to extend the capital structure even further with the debut of a leveraged super-senior CCO. BarCap has therefore taken what was initially a niche synthetic market concept and pushed the CCO into the arena of fully placeable securitised products.

Martin Woodhams, the bank's head of commodity structuring, says his team has spent a lot of the last year taking the CCO product through its life cycle by trading up and down the capital structure, from the leveraged super-senior deals to equity tranche issues. The big question, however, is whether the CCO market suffered during the credit crisis from its association with the structured credit space. "Not only have our CCOs generally performed strongly since issuance, but our clients have appreciated the ability to unwind in August and September, locking in gains," he says. Unlike investors in some parts of the structured credit market, investors in CCOs were able to get pricing and liquidity on their investments on demand, he adds.

Elsewhere, BarCap has also been busy giving investors access to new types of assets on the traditional structured note front, notably with its European Carbon Index Note. Woodhams says the bank very deliberately kept its distance from the carbon market before and during the disastrous first phase of the European Union's Emissions Trading Scheme, when carbon limits were set at such high levels that prices in the underlying market collapsed. "We refused to do any investable products during phase one because we thought there was too much political risk," he says.

Its current index simply gives a synthetic spot price of a European allowance, on the back of which the bank is issuing five-year notes that give a linear payout to the index. "We're happy that the allocation process that caused the price fall in the first phase will in no way be redone in phase two, so we started issuing products," says Woodhams.

The bank has also issued a number of hybrid and basket products, including a five-year principal-protected note linked to the performance of a basket of energy, industrial metals, soybeans and stock-linked indexes.

This year has also seen BarCap structure a principal-protected product linked to the Baltic Dry Index, which is a freight index, for a German issuing house. Again, this reflects investor demand for access to new types of exposures while also representing a play on the economic growth story in China and India. The rationale is that with demand for commodities in those markets growing exponentially, there will be a corresponding increase in demand for transport in and out of those countries for raw materials such as coal, iron ore and grain. The index itself is made up of four indexes that contain 22 different global trading routes.

BarCap's determination to be at the forefront of new developments in commodity investing places the bank at the top of the field. Whether it is coming up with entirely new concepts such as the CCO, which it then goes on to expand and improve, or whether it is seeking out new investment opportunities for end investors, the bank has established itself as a leader rather than a follower.

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