Weekly sales hit $473 million with Scotia leading the action, but month to date is still weak

By Emma Trincal

New York, March 26 - Agents sold $473 million in the week ended Friday, nearly16% more than during the previous week, but volume this month at $1.24 billion remained lower than during the Feb. 1-21 period by more than a third, according to data compiled by Prospect News.

But last week was only the third week of the month.

Most of the deals are pricing this week, especially on Wednesday. A complete picture of March volume versus February will only be available next week, sources said.

"I have a ton of deals pricing today. It's very, very busy," a distributor said on Wednesday. A majority of offerings should price Wednesday in order to close before the month ends.

One explanation for the lag on a month-to-date basis could be the existence last month of a strong week situated early on the calendar. The week of Feb. 9 was the No. 3 in size for the year with $820 million, the data showed.

Up 10% for year

But optimism prevailed among market participants as the year-to-date volume of $9.08 billion is up 10% from last year's $8.24 billion. During the same period, the number of offerings rose by 12% to 1,936 from 1,726, the data showed.

Scotia was the top agent last week, pricing a quarter of the overall volume in three deals totaling $117 million. Stock picks wrapped together in a proprietary index was the dominant theme with Bank of Nova Scotia pricing $72 million of notes linked to the Raymond James Current Favorites Total Return index. It was the top offering in size.

Commenting on the strong issuance pace for the year, a sellsider said, "There are probably two things happening. People are still pretty confident in the equity markets. And yields, the yields on corporate bonds, are still very, very low. That drives a lot of investors to seek out yield, and there are not many ways to find it. Either you go to riskier places in the fixed-income space, meaning you have to stretch your risk profile toward riskier credits, or you give up the fixed-income space and invest in equity. Equity-based structured products give you the opportunity to capture some yield in a fairly attractive way."

While the year-to-date volume of equity-linked notes is down from last year, this asset class, which includes everything except commodities, rates and volatility products, still represent 85.5% of the issuance, according to the data.

No. 1: Raymond James picks

Fifteen percent of the week's volume came from just one deal - Bank of Nova Scotia's $70 million principal amount of 0% equity-linked index notes due March 23, 2017 linked to the Raymond James Current Favorites Total Return index. The notes priced at 103 for $72.1 million of proceeds.

The premium price plus a 2.5% underwriting commission and up to 0.05% in structuring and development fees did not discourage bids, sources noted.

"I'm not surprised that a product like that can get significant traction in the U.S. because of the content aspect of it," the sellsider said.

"If you trust a proprietary research, if you're comfortable with that research, you have no reason not to follow it. In terms of portfolio allocation, investors may also be invested in other mutual funds, notes or ETFs that rely on research. It's a way to diversify risk across different stock pickers."

The appeal of the notes was derived from the underlying index, which is based on a discretionary research list of current favorite stock ideas from the Raymond James equity analysts. Each analyst, according to Raymond James, may submit his or her "absolute top idea." The list is updated once daily.

Access

The idea behind the notes is to offer investors access to a strategy, the sellsider said.

"Systematic strategies have been popular," he said.

"The algorithms or the rules will make decisions that are going to be very different from the ones a fund manager may take. It allows investors to diversify away from one decision-maker, with each analyst giving his own input."

The underlying for those notes differs from another Raymond James proprietary index called the Raymond James SB-1 Equity Index. The SB-1 Equity index, published once a year, is composed of all equity securities rated Strong Buy 1 ("SB-1") by Raymond James & Associates, Inc.

Bank of Montreal issues notes linked to the SB-1 index in December and January. Bank of Nova Scotia introduced its own Current Favorite index-linked product for the first time in September with a $128 million offering. Last week's issue was the bank's second one.

"They sort of rotate issuers, although those picks are not exactly the same. One is updated through the year while the other only comes out once a year," a source said.

Both products are also distinct in terms of access.

While access to the Best Pick deal tied to the Raymond James SB-1 Equity index can be obtained via an exchange-traded fund, the Guggenheim Raymond James SB-1 Equity ETF, it is not so with the Current Favorite index, a market participant said.

"I do like this deal. I have been able to watch Raymond James' equity research for 20 years, and they really are the best analysts. They look mostly at mid-cap and smaller companies. Since the Street to a large extent mostly follows large-cap stocks, they bring a lot of additional value. It's in the less efficient markets, the smaller companies that you can find stock ideas that are really actionable," this market participant said.

"The Scotia notes are really the only way to get exposure to the Current Favorites."

Trackers

One of the dominant types of structures seen last week were delta one products, which give investors exposure to an underlying on a one-to-one basis without downside protection.

This category included only two deals but made for 22% of the volume. The Nova Scotia deal was one of them. The other, which was the No. 4 in size, was Barclays Bank plc's $31.2 million of 0% notes due June 24, 2014 linked to the Topix index, with J.P. Morgan Securities LLC as the agent.

Autocallables

The top structure was autocallable reverse convertible notes. The second largest offering in this group was brought to market by Morgan Stanley in $35.65 million contingent income autocallable securities due March 26, 2015 linked to Facebook, Inc. stock.

The call threshold is the initial stock price, and the contingent quarterly coupon offers an annual rate of 18.05%.

Investors are fully exposed to any losses.

Leverage

Leverage with full downside risk was the big loser last week, with only four such deals pricing for a total of $18 million. It represented in volume less than 4% of the total, a decline of 61% from the previous week.

"It might be completely random or linked to the crisis in Europe," the sellsider said.

For the year, leveraged notes with no downside protection have seen their volume plummet by 34% to $1.22 billion from $1.85 billion, according to the data.

Leveraged buffered notes are getting expensive, this sellsider said.

Making buffers

In some cases, issuers offer attractive levels of protection by getting rid of the leverage and maintaining the cap on the upside. Some leverage may be included on the downside. This was the structure of last week's third top deal, which was also brought to market by Bank of Nova Scotia.

This issuer sold $35.21 million of 0% capped buffered notes due March 23, 2017 linked to the MSCI EAFE index.

The payout at maturity will be par plus any gain in the index, up to a maximum return of 30%. Investors receive par if the index falls by up to 20% and will lose 1.25% for each 1% decline beyond 20%.

Scotia Capital (USA) Inc. was the underwriter with Goldman Sachs & Co. as dealer.

Scotia tops

Scotia was by far the top agent last week, pricing 25% of the total volume in three deals totaling $117 million. Bank of Nova Scotia was the issuer on all three.

"It's a new name, a high-quality name, and they're getting more visible," a distributor said.

Scotia for the year to date remains a small agent ($187 million), although it closely beats Bank of Montreal ($178 million), Deutsche Bank ($176 million) and Wells Fargo ($134 million).

But Scotia has seen the greatest growth rate in volume, with its business up 117% from last year, according to the data.

"They're making a push, that's for sure," a source said.

The second agent last week was Barclays with $66 million, followed by UBS, which priced $64 million.

"I have a ton of deals pricing today. It's very, very busy." - A distributor on Wednesday

"Systematic strategies have been popular." - A sellsider

© 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.