Issuance is down 2.35% so far this year, but sources hesitate to say confidence is gone

By Emma Trincal

New York, April 10 - Recent issuance figures showed a mixed picture regarding investors' confidence in the market, but a slight slowdown is seen as temporary and seasonal, with tax season being the main culprit, sources said.

Volume was down month to month as well as year to date, according to data compiled by Prospect News.

"Confidence is very fickle. On the retail side, it can turn into negativity anytime. People are watching Cramer and listen to him when he tells them to sell," a sellsider said.

"We've seen that on Friday with the disappointing jobs report. People freaked out, but it was short-lived and driven by high expectations. The reality of it is that the numbers are not going to be high for a while. We just have to kind of accept it.

"But as far as the structured notes market, we wouldn't be at the levels we are right now if there was no confidence."

Slight downward trend

Agents from April 1 to 6 sold $182 million in 72 deals, a 58% decline from the $438 million volume sold during the same time last month. Sales dropped by 11.35% from $206 million sold during the same period a year ago.

For the year, sales have fallen only 2.35% to $10.11 billion from $10.36 billion. The number of offerings has declined to 2,099 from 2,256.

The number of large deals, however, has remained rather stable. There were 21 deals in excess of $50 million this year versus 23 last year. The number of deals of $20 million and bigger was virtually the same -112 in 2013 versus 111 last year, according to the data.

"Overall, I'm optimistic on the structured notes side. You're still capturing good returns for the risk," the sellsider said.

"A lot of yield products, call structures are out there; we see a lot of leveraged deals tied to the Russell and the S&P, and we still see some buffers selling well with the leverage and the cap on the upside.

"For the most part, it's business as usual."

Taxes, Korea

Factors that may put investors' confidence under pressure, he noted, may ironically have to do with the good news in the equity market as well as some geopolitical wildcards.

"People are just a little concerned about the levels and how far we can go in this bull market, if we can break through these highs and what is it going to take," the sellsider said.

"It will take better job numbers and some resolution of the current situation in Korea, I think.

"The market may not be totally aware of it and may be focusing on U.S. economic data, like unemployment numbers, but those geopolitical events do matter. Think about the impact of a serious crisis in North Korea on China, the major manufacturer in the world. It could easily slow down the global recovery and reverse the bull trend in equities. That of course would not be neutral for structured products."

Last week saw the issuance of $182 million versus $395 million the week before.

"You're talking end of the month versus the first week of the month. In the first week of the month, you're not going to have deals. Issuance will be small. There won't be much going on," the sellsider said.

This sellsider attributed the monthly decline to isolated events, not a structural change in terms of investors' demand for products.

"April 15 is just coming up. People are focusing on just getting their taxes done. They lose focus on the investment side of their lives. After April 15, we'll see things come back to normal," he said.

"I still see volume coming in. But you have to take into account what's going on in North Korea and what is occurring in Europe with the recent Cyprus crisis. It may have contributed to the slowdown."

Leverage

Leveraged notes remained the top structure, but the picture here too was mixed depending on the type of structure and whether it included some partial downside protection - with a buffer or a barrier - or not.

For the year to date, investors had a preference for leveraged notes with no downside protection. Those represented 22.35% of the total versus 16.20% for buffered or barrier enhanced notes, according to the data.

Leverage with no downside protection almost doubled during the period, up 94%, while the other category of leveraged notes was down 22%.

For the month to date, however, it was the opposite: defensive leveraged structures made for 23.70% of the total versus less than 8% for the non-protected ones. Both product types declined in volume, but leverage with no protection dropped twice as fast, according to the data.

Michael Iver, founder of iVerit Consultancy and a former structurer, said that he was surprised not to see more volume in leverage in general and to see some of those deals decline in volume from last year.

"With the market trending up and volatility still coming down, you would expect to see a lot of confidence in the market. You would also expect people to do a lot more leverage as the options are cheap," Iver said.

"I'm not sure I'm seeing this level of confidence.

"It could be one of two things: either the market is oriented toward coupon and yield and selling protection or maybe people are not as confident as the indicators suggest."

Autocallable reverse convertibles, one example of a yield-oriented structure, have more than doubled in volume so far this year. They have grown 117% to $1.72 billion from $795 million, according to the data. They are the second most popular structure after leverage. The number of those deals climbed to 629 from 480.

Commenting on the type of leveraged products investors tend to favor, the sellsider said that it was hard to know why in one given week people might prefer leverage with more upside and full downside risk versus buffered products a week or a month later.

"People's minds change rapidly," he said.

"Maybe a few weeks ago, when the market was an all-time high, investors may have said, 'I should get a bit of downside protection.' When it came down, they may have thought, 'I might as well capture as much gain as I can.'

"It depends on the type of investor, on whether someone is looking for downside protection or straight upside."

Deals

Deals were small in size last week with the biggest offering priced at $12.17 million. There were only four products over the $10 million size versus 40 the week before.

The top product last week was a very bullish structure geared toward the upside. JPMorgan Chase & Co.'s $12.17 million of 0% equity notes due Oct. 7, 2016 linked to the Euro Stoxx 50 index converted into dollars offered full upside potential with a digital enhancement of 49% as a minimum contingent return when the index finished positive. Investors were in exchange fully exposed to losses.

"We're seeing a lot of Euro Stoxx deals. A lot more requests are coming in. It's due to pricing," the sellsider said. "The Euro Stoxx is more volatile than the S&P 500 or the Russell. Investors can end up with better caps, better leverage. They're willing to take a lot more risk for the return that they get. In a way, the structures tied to the S&P are more risky for the return that they get. And as the Cyprus issue has got cleared up, many think it's a good time to jump in.

"We're also seeing a renewed interest in global, more volatile equity indexes like notes tied to the [MSCI] EAFE index.

"Those products, popular earlier this year, had kind of fallen off because of the Cyprus crisis. But they're coming back."

Equity-linked notes are up 5.40% year to date, but the bulk of the growth is due to equity indexes (up 6.86%) rather than single stocks (down 1.18%).

"When you're at the early stages of a recovery, investors don't have the confidence to put bets on individual stocks," said Iver. "Indexes are more popular because we're still at the beginning of the recovery. People are more comfortable buying the entire market."

Foreign exchange deals have grown in volume this year, up 52% to $340 million from $223 million. But their size as a percentage of the total volume issued remains less than 5%, or 3.36% this year.

HSBC USA Inc. priced last week's second-largest deal using this underlying asset class with its $11.53 million of 0% barrier notes with step-up digital return due April 21, 2014 linked to the performance of the Brazilian real relative to the dollar. If the real appreciated by more than 3%, the return was 28.5%. If the currency return was comprised between zero and 3%, investors would get 5%. The product included an 85% barrier on the downside. The agent was JPMorgan.

Rates deals have more than doubled this year, up 111% to $315 million from $149 million last year. But as with FX notes, their market share is limited, as they amounted to only 3.11% of the total.

Rates-linked notes in these totals do not include longer-dated plain-vanilla rates products such as step-up notes, step-down notes, fixed-to-floating notes and capped floaters.

JPMorgan was the top agent last week, selling 15 offerings totaling $73 million, or 40.3% of the total. It was followed by UBS and Goldman Sachs.

"In the first week of the month, you're not going to have deals. Issuance will be small." - A sellsider

"Indexes are more popular because we're still at the beginning of the recovery." - Michael Iver, founder of iVerit Consultancy and a former structurer

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