Private banks, rollovers pushed sales to new highs last week, but yearly business still behind

By Emma Trincal

New York, Feb. 29 - Issuance volume surged last week, but sales are still lagging on a year-to-date basis compared to last year, according to preliminary data compiled by Prospect News. Sources noted several trends such as a decline in single-stock issuance and a renewed interest in notes linked to commodities and exchange-traded funds.

Sales of U.S. registered structured notes, excluding exchange-traded notes, surged last week to $1.07 billion priced in 178 deals, a 130% increase from the previous week, which saw the pricing of 148 deals amounting to $464 million.

"The ticketing process occurred last week, and most of the structured products flow comes from the big houses: Bank of America and JPMorgan," a structurer said.

Compared to the same period of last month - Jan 1. to Jan. 25 - February marked a turning point. Issuance jumped 30% to $2.32 billion in 540 deals from $1.79 billion in 416 deals.

These figures are subject to changes due to the ongoing flow of Securities and Exchange Commission filings.

For the year to date, however, sales remained subdued compared to last year.

Activity dropped by 42% to $5.22 billion from $9.02 billion sold during the same period last year. Simultaneously, the number of deals increased to 1,185 from 1,006.

Equity highs

"Volume is still lagging from last year because a year ago, the market was not that high and investors had nothing to lose. They were willing to take on leverage, often up to three times exposure, to get their return," the structurer said.

"But now that the market has reached new highs, it's harder to get people off the sidelines. You're hitting some walls, and what you get in volume is a lot of rollovers.

"It's hard to get new money in the structured products area."

Last week, the S&P 500 index closed at its highest level since June 2008.

"If you look at structured notes, most products are long the market. Notes purchased a year ago have done very well both in equities or commodities," this structurer added.

"Last year, a lot of people wanted gold notes, and they got 40% returns on those notes.

"Are they going to do it again for another year or two? Two years ago, you believed the market was undervalued. There was a convincing story there. Do you believe it's undervalued now?"

Equity-linked notes increased by 145% last week to $810 million, or 76% of the total. The asset class increased also on a month-to-date basis (up 25%) but was down 35% for the year.

Stock decline

Within the equity asset class, single stocks have suffered the most while sales of equity index-linked notes have either increased or remained stable, depending on the observation period.

Sales of single stock-linked products declined by 20% last week and were down by 3% on a monthly basis. For the year to date, a 62% decline is more telling.

Separately, equity index products rose by 204% last week to $633 million and were up 42% for the month to date.

"You always have the core types of exposures into the S&P," the structurer said.

"Indexes are in a better shape because they're always going to appeal to the portfolio allocation type of investor," a sellsider said.

Equity index issuance, however, dropped by 16% this year compared to last year.

Last week saw a push in the ETF underlying category, this asset class rising from $31 million to $104 million. The increase, however, was mostly driven by last week's largest deal, which was brought to market by JPMorgan and uses this asset class in the form of a synthetic basket of ETFs.

JPMorgan Chase & Co. priced $72.43 million of 0% notes linked to the performance of the JPMorgan ETF Efficiente 5 index, which tracks the excess return of a portfolio of 12 ETFs that is rebalanced monthly.

The notes offer principal protection and a 110% participation rate on the upside.

The decline in single-stock issuance was the result of current market factors, sources said.

"To sell a structured product, you need to add value. You need to either provide protection or enhanced return so that you offer investors a reasonable opportunity to outperform the vanilla exposure," the structurer said.

During a rally, he explained, bullish investors have less incentive to cap their returns as the price to pay for obtaining leverage or downside protection.

Commodities

Commodities surged last week to $143 million from $22 million the week before, largely as a result of Bank of America Corp.'s push. This agent sold six commodity deals in excess of $10 million, among which two reached the $20 million size.

The largest one in this series of six was Bank of America's $45.18 million issue of 0% Capped Leveraged Index Return Notes linked to the gold spot price.

The structurer said that the renewed interest in commodities is not a surprise.

"Commodities last year peaked in April and May. The Dow Jones - UBS Commodity index was at 179 in April. It's now at 148. For investors looking for exposure in terms of view, there is now room to grow," he said.

"You also have institutional money buying commodities-linked products, but since they are 144A, they don't pop up."

Bank of America's six large commodities deals used broad benchmarks such as the Rogers International Commodity Index - Excess Return or the Dow Jones - UBS Commodity Index Total Return 3 Month Forward as well as single commodity exposure such as plays on silver or agriculture. The agent sold $16.78 million of capped leveraged notes linked to the front-month crude oil futures contract.

The structurer noted that very few oil offerings priced last week.

According to Prospect News data, there were only two other oil offerings priced last week. Morgan Stanley priced one of them and Credit Suisse AS, Nassau Branch the other, but both were less than $10 million in size.

"You haven't seen a lot of oil deals yet, but it's probably because oil became a story in the financial press last week. Look for oil notes next month," the structurer said.

Buffered notes

Investors picked structures that gave them protection both last week and for the month.

The top structure for the month as of Friday was leverage with partial downside protection with 53 deals totaling $659 million, or 28.5% of the total, a 227% increase from the prior month.

Last week, this structure alone made for nearly 30% of the total.

In that category, Barclays Bank plc priced $62.29 million of 0% Capped Leveraged Index Return Notes due Feb. 28, 2014 linked to the Dow Jones U.S. Real Estate index, the top offering in this structure category and the third largest deal.

The leverage factor is two times, the cap is 34.1%, and the structure offers a 10% buffer. Bank of American Merrill Lynch was the agent.

Autocallable

Autocallable deals fared well both for the month and the week, picking up in volume by 24% and 83% for the week and the month, respectively.

These structures increasingly use indexes as their underlyings rather than single stocks, the data showed.

Out of the six autocallables that priced last week, only three had a significant size of about $20 million or more while the others did not reach the $1 million size.

None of those big three autocallables - all sold by Bank of America and issued by Barclays - used a stock. Each was tied to an index.

The top one was Barclays' $76.35 million issue of Strategic Accelerated Redemption Securities linked to the S&P 500 index, followed by a $20.92 million deal linked to the iShares MSCI Emerging Markets index fund. The third one was $19.72 million in size and was linked to the Russell 2000 index.

Reverse convertibles

Reverse convertibles in the meantime, which are all linked to single stocks, continued to decline. The largest reverse convertible product pricing last week was $2.2 million.

The decline in reverse convertible issuance is directly related to the lower appetite for single stocks, the sellsider said.

"There are not as many stock deals now. We've noticed the trend, and it's hard to explain why," a sellsider said.

"The only explanation I see is that equities have done very well, stock deals are capped, and people are going long equity at this point.

"Also, volatility has been coming in on single stocks over the past three or four months.

"People are in shock when they compare what they got a year ago with what they have now. When you had a 10% or 20% cap with a 30% contingent buffer a year ago, you now have a 20% buffer and if you're lucky, a 10% upside. Terms aren't as good, and that could be a driving factor."

Bank of America topped the league tables last week by a large margin, selling $703 million in 25 deals, or just about two-thirds of the total.

It was followed by JPMorgan, which priced 14 deals totaling $209 million, or nearly 20% of the volume.

For the structurer, those rankings are not a surprise because the majority of the market, in his opinion, is driven by the big private bank channel.

"All this volume is retail. It's all from the big houses. It's not driven by third-party," he said.

"It's hard to get new money in the structured products area." - A structurer

"People are in shock when they compare what they got a year ago with what they have now." - A sellsider discussing reverse convertibles

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