Volume more than doubles in short week, but month-to-month sales end up slightly down

By Emma Trincal

New York, Nov. 30 - Sales of structured notes grew by more than two-fold in the week ending with Thanksgiving and Black Friday, but volume for November as of last week had declined by 3.31% compared to the same time in October, according to data compiled by Prospect News.

The figures do not include exchange-traded notes.

The month was not over, but a sellsider said that "nearly everything" priced last week "between Monday and Wednesday."

Volume

Agents sold $1 billion last week, a 114.65% increase over the $468 million sold during the prior week.

Only seven out of last week's 240 offerings were priced on Friday.

Some sellsiders put last week's robust issuance pace in perspective.

"We're done for the month. It's always big on the last week of the month," a New York sellsider said.

But this sellsider said that selling products has become tougher in today's market environment given the uncertainty created by the European debt crisis.

"People don't have a view. Things have been very slow for the past four months," he said.

"It's very tense here on the desk. It's a nightmare. People are worried for their jobs, I can tell you that."

Sales month to date fell to $2.17 billion from $2.24 billion.

However, from the beginning of the year to Nov. 25, volume grew 9.21% to $39.23 billion from $35.92 billion during the same time last year.

The pace of the year-to-year increase is slowing down somewhat. A month ago, yearly issuance volume was up 15% from the comparable period of 2010.

Leading agent

Bank of America Merrill Lynch tends to price the majority of its deals at the end of the month, which explained last week's strong level, the sellsider said.

Merrill Lynch alone priced more than half of last week's total volume with $742 million in 198 deals, according to data compiled by Prospect News.

This agent also priced the top six deals.

"They have thousands of brokers. It's not a surprise they can sell so much. All you have to do is push a button and your brokers all over the country can show the product. It's the biggest bank, and they obviously have a good franchise," the sellsider said.

Risk on

Investors demonstrated some bullishness last week as evidenced by a strong bid on equities and commodities.

Notes linked to equity assets increased by 139% and made for three-quarters of the total with $742 million issued for the week.

Within that asset class, equity index-linked notes soared to $590 million from $159 million, breaking with the monthly trend, which saw a stronger growth in single stocks.

Stocks last week decreased by almost 1%, while they were up 67% for the month.

Commodities did very well last week, growing almost three-fold to $130 million from $44 million.

However, commodities on a month-to-month basis did not fare well, declining by 38% to $189 million from $303 million.

For some, the appetite for risk was difficult to comprehend.

"Nothing is market-driven anymore. It's all political. You can't carry on fundamental analysis on what politicians are going to do," a market participant said.

"Look at today: The market is up after the central banks announced that they'll provide short-term dollar funding. That's what makes the market rally today. But who knows about tomorrow.

"I don't know how people can be bullish at this time."

The S&P 500 index fell by 4.7% last week, and the CBOE Volatility index, or "fear gauge," jumped nearly 8%.

"I guess people want to go back in. They're not as scared as they were. It defies logic, but that's the way it is," the market participant said.

"Things go up pretty much. They go down pretty much. It's ridiculous. Maybe people think we've reached the bottom."

Pure leverage

Leveraged notes structured without any downside protection surged to $188 million from $8 million the week before, a sign of relative bullishness, according to sources.

The structure prevailed in the weekly period, accounting for 19% of the total, but also for the month with 15% of the volume.

"Leverage indicates more bullishness, that's for sure," the market participant said.

An example was Barclays Bank plc's $40.68 million of 0% Accelerated Return Notes due Jan. 25, 2013 linked to the S&P 500 index sold by Merrill Lynch.

The leverage factor is three. The return is capped at 23.76%, and investors have full exposure to losses.

For the sellsider, pricing factors explain the large supply of leveraged deals that lack barriers or buffers.

"Protections cost too much, it's that simple. Everything is falling apart," he said.

Currencies grew 65% to $168 million from $102 million the week before.

A big deal, the fourth largest one of the week, contributed to this result.

Bank of America Corp. priced $37.37 million of 0% Market Index Target-Term Securities due Nov. 29, 2013 linked to a basket of equally weighted Asian currencies.

The underlying currencies are the Indonesian rupiah, the Indian rupee and the Chinese renminbi. The structure offers a leverage factor of 1.93 with full principal protection.

Reverse convertibles increased by 33%, amounting to $101 million in 93 deals, or 10% of the total.

The top deal in this category, and the fifth largest offering of the week, was Bank of America's $36.63 million of coupon-bearing notes due Dec. 6, 2012 linked to the common stock of Deere & Co. The notes offer a 17.42% buffer.

Step-ups

Step-ups were one of the most popular structures and ranked high on the list of Merrill Lynch's deals.

An example was the No. 1 offering, Bank of America's $52.81 million of 0% autocallable enhanced market-linked step-up notes with buffer due Dec. 2, 2013 linked to the S&P 500.

If the index finishes above the step-up level of 156.4% of the initial level, the investor will get par plus the index return. If the index finishes at or above 90% of the initial level but at or below the step-up value, the payout will be par plus 56.4%. Investors are fully exposed to losses beyond a 10% decline.

The notes will be automatically called at par plus a call premium of 10% if the index closes at or above its initial level on Nov. 30, 2012.

The No. 3 deal was another Bank of America step up. The $37.89 million offering of 0% market-linked step-up notes due Nov. 22, 2013 linked to the S&P 500 index features a step-up value of 132% of the initial level and a 10% buffer.

The No. 2 agent last week was JPMorgan with $124 million sold in 26 deals, or 12.35% of the total. It was followed by Morgan Stanley with 10 deals totaling $89 million, or nearly 9% of the total.

"It's very tense here on the desk. It's a nightmare." - A New York sellsider

"I don't know how people can be bullish at this time." - A market participant

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