Monthly volume grows nearly 80%, pushed by big houses, large mid-September deal, big week

Emma Trincal

New York, Oct. 3 - Monthly volume in September surpassed the prior month, which has not always been the case this year, according to data compiled by Prospect News.

Sources pointed to several factors including the big houses' momentum in the last week of the month, several large rollovers, a big offering brought to market by Deutsche Bank AG, London Branch in mid-September and of course people going back to work at the end of the summer.

The month saw volume rise by 78% to $3.22 billion as of Friday, which covers all of the business days in September, from $1.81 billion in Aug. 1 through Aug. 29.

During the full month of August up until to the 31st, agents sold $2.86 billion, which indicates that even with the inclusion of the last two (and most active) days of August, September's total still surpassed August by 13%.

Last week closed the month on a robust note as agents priced $1.79 billion in 292 deals, a more than three-fold increase in volume from the $467 million sold during the prior week, according to the data.

Last week's volume was up 23% from the comparable last week of August ($1.45 billion), another sign of improvement.

The momentum seen in September compared to August was due in part to the pricing of the second-largest deal of the year, a source said. Deutsche Bank priced $429.64 million of 0% knock-out notes due March 19, 2014 linked to the Euro Stoxx 50 index on Sept. 14.

Sales in April, June and July were down from their respective prior months. The trend changed in August, when volume picked up from July by 32%. The upward trend may simply be gaining momentum in September, sources noted.

"The most likely explanation is that people are back from their vacation," a market participant said.

But in some corners, optimism has yet to be felt.

"In the past three months, we haven't seen any pickup, especially on the notes," a sellsider said.

"At the contrary, we've been facing a consistent decline. We're doing now $30 million a month, down from $60 [million] to $70 million at the start of the year. That's pretty drastic.

"The decline is caused by low volatility levels, which do not facilitate the pricing of attractive products."

Leverage, indexes

Nearly half of last week's deals were built around leverage, split equally between notes with and without partial downside protection, the data showed.

Leveraged notes have established their lead in the market, remaining the most favored structure this year as they account for a third of the sales.

Also on the year-to-date basis, equity indexes and exchange-traded funds represent the only underlying asset classes to have increased in volume. They are up 20% and 13%, respectively. All other asset classes have declined, in particular single stocks, which are down 41% this year compared to last year, the data showed.

But the prominence of equity index-linked notes was also due to Bank of America, a firm that routinely offers benchmark-based products to its retail clients, according to sources.

Bank of America sold nine of the largest 10 offerings last week, except the top one, which was brought to market by Barclays. Nearly half of those large Bank of America deals were linked to equity indexes and offered some sort of leverage, according to the data.

The 80/20 rule

Bank of America's nine deals among the top 10 accounted for $618 million, or 72% of what the firm sold to its clients last week. Meanwhile, the firm priced 26 deals totaling $863 million.

"I think Merrill is very good at the 80/20 rule," the market participant said. "It's not quite 80/20, but it's close. The top third of what you do makes for 70% of your volume. The bulk of the activity revolves around big-ticket sales.

"It shows how focused their investment professionals are, especially given the fact that there is not much of an open architecture culture at Merrill. Their focus is only on a certain number of deals. They probably do a very good job of letting the people know what's out there and who the prospective clients are."

Bank of America also presents simple structures and popular asset classes, which is a plus with retail clients, the market participant said.

Eighteen out of Bank of America's 26 offerings last week were linked to equity indexes, or 70% of this firm's sales, according to the data.

"Mr. and Mrs. Smith when they wake up in the morning don't have a view on the slope of the yield curve or what rates are going to be. They're more likely to look at the equity markets and in particular at what they know like the S&P 500 or the big benchmarks," the market participant said.

Rolling

A structurer said that the improved volume overall was a combination of factors.

"It's mostly the big houses that pushed volume up. Deutsche Bank had a big trade last month. These are two explanations. But you also have rolls. The big firms must have been rolling big deals from last year," he said.

"A lot of the offerings, usually 14-month deals, were priced last summer. July of 2011 was a big month, before the world turned in a different direction.

"You also have some step income deals done last summer that have been called out. For the most part, I think the pickup in volume is more rolling-based than anything else.

"Each time volume goes up or down you have to look at two things: has the market been better, the terms more favorable? That's one thing. But also, what's going on that month? Are we seeing a lot of deals rolling?"

The size of the deals was a sign that last week was firmer than usual. Agents brought to market five deals greater than $50 million versus only one the week before. They were 42 offerings of $10 million or more against 12 the week before.

Top deals

Barclays Bank plc sold the top deal last week, $143.25 million of 0% capped participation notes due Oct. 9, 2013 linked to the spot price of gold. The payout at maturity will be par plus any percentage increase in the price of gold, subject to a maximum return of 17.5%.

Investors will receive par if the price of gold falls by up to 15% and will be exposed to losses from the initial price if it falls by more than 15%.

Bank of America Corp. priced the No. 2 deal with its $130.52 million of 0% Accelerated Return Notes due Nov. 27, 2013 linked to the S&P 500 index. The leveraged note has a 300% participation rate on the upside with a 16.14% cap and no downside protection.

Bank of America priced a similar structure also over $100 million in size with the third largest deal of the week, $114.13 million of 0% Accelerated Return Notes due Sept. 26, 2014 linked to the S&P 500. The leverage factor is also three and there is no downside protection. The cap is 21.63%.

Royal Bank of Canada priced the top single-stock deal, $45.57 million of 14% STEP Income Securities due Oct. 11, 2013 linked to the common stock of Delta Air Lines Inc. It was the eighth largest, and it was also distributed by Bank of America.

Bank of America was the top agent, selling 48% of the market. It was followed by Barclays and by Morgan Stanley.

"The most likely explanation is that people are back from their vacation." - A market participant

"The big firms must have been rolling big deals from last year." - A structurer

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.