Just as commodity investments seemed to be making the jump from the alternative to the mainstream camp, along came the second quarter's bout of extreme market volatility, and with it a hard dose of reality. But that has not stopped one of the most successful commodities houses, Barclays Capital, from innovating and pushing through new product sales. It's for this reason that we have opted to honour BarCap for its commodities innovation for the second year running. "So far this year, in terms of structured notes other than what we've done with the collateralised commodity obligations (CCO), we're up to $3.3 billion worth of issuance," says Martin Woodhams, the bank's London-based head of commodity structuring.
BarCap's commodity-linked business came into its own at the end of 2004 when it launched the world's first CCO, called Apollo. Similar to a synthetic collateralised debt obligation (CDO), Apollo's underlying assets consisted of 'commodities trigger swaps' rather than credit default swaps, with trigger events set at particular commodity price levels. How often these days do we find an investment bank trumping the competition by producing a completely new product? That's what BarCap achieved here with its synthesis of credit and commodity structuring and pricing expertise. Certainly, it could be argued that the first CCO was inevitable given the growing investor interest in commodities and alternatives, increased global commodity market liquidity and the rapid break-out of structured credit technology, and yet only now are BarCap's competitors starting to issue their own versions of a CCO.
Extending the CCO concept
But just as the competition seemed to be starting to catch up with BarCap, in June of this year the bank took the CCO concept a step further when it teamed up with Trust Company of the West to launch a managed version of the product called Everest I. "We've taken this product on the same development course that the credit markets have taken, which is first to deliver a static version and then to extend it to managed," Woodhams says. "We closed our first issuance with more than $325 million in four different currencies, and we sold it to more than a dozen customers." The CCO product was made with institutional fixed-income players in mind, who are increasingly looking for a combination of yield enhancement and diversification. However, Woodhams says the managed version is likely to also permeate the retail market.
The bank has used its managed, synthetic CCO structuring expertise to come up with a branded retail product - sold to high-net-worth and private clients across Europe - called the Multi Commodity Note. The notes are effectively an AA+ rated tranche of Everest I, designed to give wealthy investors access to yield-enhanced, bond-like alternative returns. "This is just another example of how varied the risk and reward profile is that we can deliver to clients, and how it matches very much what we are able to do in the equity markets, which are highly sophisticated and mature relative to the somewhat immature commodity markets," Woodhams notes.
The bank sold $105 million of the note in euros, Swiss francs and dollars. So how did May and June's commodity market volatility affect the CCO product? Surely the equity tranche holders, at least, must have taken a hit? "No," Woodham replies, "because the product is not structured around where the spot markets are." The CCO is a five-year product, with payment of the principal dependent on the prices of the underlying commodities - which consist of precious metals, base metals and energy - over a short averaging period immediately prior to maturity. "The structure incorporates a European payoff feature, so it's only where the markets are in five years time that matters. The forward markets in commodities have not been affected in terms of being sold off, as they have lately been at the front of the curve," Woodhams says.
WHY BARCLAYS CAPITAL WON
Market volatility has not stopped BarCap from launching ever more innovative commodity-linked products. The bank's commodities muscle is the envy of its competitors.