Volume drops to $484 million; rising interest rates, year-end break blamed for decline

By Emma Trincal

New York, Dec. 15 - Issuance dipped last week. Some sources attributed the reduced speed to the recent surge in interest rates while others said that it was mainly due to it being December, a slow month.

Agents sold $484 million in 61 deals in the week ended Friday, down 72% from the week before when firms priced $1.74 billion in 90 deals, according to preliminary data compiled by Prospect News.

The prior week saw the pricing of $1.28 billion of exchange-traded notes, which made for three-quarters of the volume. In contrast, ETNs amounted to less than 10% of the volume last week with no big offering in sight for this category.

Volume slump

On a month-over-month basis, volume was down 50% from the week of Nov. 8.

Sales also registered a 10% decline from last year's comparable week.

The number of large deals shrank as well: Only one offering in excess of $100 million priced last week, versus 13 transactions during the first week of December.

"I've noticed a slowdown, and a lot of that has to do with interest rates increasing," said Brad Livingston, a distributor with Laidlaw & Co.'s Income Solutions Group.

"Anytime you have such a move in interest rates, it will affect what can be issued.

"Some of the deals being offered two or three months ago, I haven't seen them since."

He cited some currency notes as well as deals based on the Dow Jones Industrial Average, which "are not as plentiful as they used to be."

December

Others attributed the reduced activity to "this time of year."

"It's the end of the year. It's completely dead," said a New York sellsider.

"Banks are paying their bonuses, and December doesn't count in the budget. You're really getting paid for until the end of November."

Equities

Equities-linked notes issuance, as a percentage of the total proceeds, declined last week to 62% from 75%.

The stock market was somewhat flat with the S&P 500 up 1.4%.

Volatility as measured by the Chicago Board Options Exchange Volatility index fell 2.2% to 17.6.

Within the equity asset class, deals with stocks or exchange-traded funds as underlyings prevailed over equity indexes.

Notes linked to ETFs for instance reached $85 million, or 17.6% of the total, an increase from the $30 million sold the week before, which was only 1.7% of the market.

Stock deal issuance jumped to 20% from 7.5%, but volume, at $96 million, decreased from the $129 million recorded during the prior week.

Bank of America Corp. priced the top single-stock offering - which was also the third-largest deal - with $34.09 million of 7.5% Step Income Securities due Dec. 22, 2011 linked to the common stock of Microsoft Corp.

Emerging markets spice

A number of ETF-linked notes offered investors access to emerging markets, a dominant play for the week.

Livingston said that the use of ETFs in deals giving investors access to non-developed countries made sense.

"With ETFs, it's so much easier to get a diversified portfolio of emerging market stocks as opposed to picking the individual companies," he said.

The emerging market supply was offered in leveraged buffered structures and through the use of the iShares MSCI Emerging Markets index fund.

Barclays Bank plc and Goldman Sachs Group, Inc. sold the three emerging market deals totaling $51 million.

This macro-economic trade represented nearly 11% of the total volume.

"There is the expectation that a global recovery is coming, and emerging markets are part of the global recovery story," said Livingston.

"Anytime you want to be a savvy investor, you want to be ahead of the recovery."

Autocallables on top

Autocallable notes were the top structure with 15% of the total.

The top autocallable offering was the second in size for the week and came from Eksportfinans ASA, which priced $36.51 million of 0% Strategic Accelerated Redemption Securities due Dec. 21, 2011 linked to the S&P 500 index via Merrill Lynch. The call premium is 9.8%, and the notes have quarterly observation dates and a 5% buffer.

"The autocallables I see seem to have [a] little more stable names such as GE or Wells Fargo than reverse convertibles," said Livingston.

Only $24.5 million reverse convertible notes priced last week, or approximately 4% of the total.

Livingston suggested that autocallables may be a better fit for more risk-adverse investors when compared to reverse convertibles given that they are often structured around less-volatile stocks.

"Autocallables tend to have a lower coupon but give a better opportunity of not breaching the barrier," he said.

Leveraged buffered notes were the second most popular structure with $68 million, or 14% of the total.

Pressure is still on

Despite more subdued volume, agents were still able to sell large deals, sources noted. Three of them exceeded $30 million in size.

"It's the end of the year, but there's still some pressure on brokers to get deals out," a market participant said.

"You want a nice paycheck for the end of the year.

"Managers are reviewing goals and put some pressure to sell some deals."

Eksportfinans was the leading issuer of the week.

Eksportfinans priced the top transaction, a $106.16 million issue of 0% equity index-linked notes due April 16, 2012 linked to the Topix index via Goldman Sachs.

"Eksportfinans is a popular name because people need credit diversification," the sellsider said.

Goldman Sachs No. 1

Goldman Sachs topped the week with $180 million sold in seven deals, or 37% of the total.

It was followed by Merrill Lynch as No. 2 and JPMorgan as No. 3.

Merrill Lynch and JPMorgan hold the same ranking on a year-to-date basis.

Barclays is the top agent for the year while Goldman Sachs is only ranked sixth.

"I've noticed a slowdown, and a lot of that has to do with interest rates increasing." - Brad Livingston, a distributor with Laidlaw & Co.'s Income Solutions Group

"It's the end of the year, but there's still some pressure on brokers to get deals out." - A market participant

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