Week's volume is modest; BofA makes push ahead of earnings blackout; non-U.S. deals in focus

By Emma Trincal

New York, April 16 - Volume was modest in the week ended Friday as the Nasdaq experienced three consecutive days of sell-offs. But issuance may have been even more lackluster without the exceptionally high participation of Bank of America, which is usually more subdued early in the monthly calendar.

In the second week of April, which was also the first full week prior to the April 15 tax deadline, investors bought $463 million in 91 deals, compared with $557 million in 121 offerings the week before, according to data compiled by Prospect News. Investors often need to raise cash to pay their tax bills, plus there is the fact that it was still in the early part of the calendar, sources said.

BofA's push

What made last week different was Bank of America's 38% share of the total volume, which led some to assume that without the top agent's contribution, last week would have been exceptionally slow.

The 38% rate is high when compared to the second week of March, when Bank of America priced 12% of the volume. This agent tends to price most of its deals in the final week of the month. During the final week of the month, Bank of America sells nearly half of the total volume based on this year's data.

In the last week of March, Bank of America sold 48% of the total volume; it priced 45% in the last week of February and 51% at the end of January.

"[Bank of America] is a powerhouse with 15,000 financial advisers. They do most of their business at the end of the month, but they may have some big deals before. Things that get done before the end of the month may be institutional deals. With these institutions, when they're ready, they're ready, whereas retail investors take a longer time to make a decision, which is why they get priced at the end of the month," a sellsider said.

Bank of America's offerings last week were relatively large in size with nine deals totaling $175 million, according to the data.

Another explanation may be that Bank of America was scheduled to report its first-quarter earnings on Wednesday.

"They've been in blackout as of last Friday up until [Thursday]," a market participant said on Wednesday.

Blackouts are designed to prevent insiders of a company from trading prior to earnings announcements in order to minimize the risks of insider trading.

"It's possible they may have wanted to do more deals in anticipation of the blackout," he added.

Volume for the year has grown 14% to $12.01 billion from $10.54 billion, the data showed. The number of offerings has grown to 2,488 from 2,185.

The month-to-date volume is up 85% from March with $756 million in 172 deals. In addition, agents in the first 11 days of April saw volume increase by 30% from the same period last year.

"The increase on a month-to-date basis could be due to a few big deals, the sellsider said.

"But the 14% increase from last year is much more relevant, and it's encouraging."

Europe, Japan

Another trend seen last week was the shift in investor demand away from U.S. equity into international equity and in some cases alternative investments such as gold or real estate.

"There is lots of focus on Europe and Japan. Where investors are still skittish is in emerging markets. Japan is the story at the moment. Japanese shares are on the rise. The economy is showing signs of recovery," the market participant said.

According to the data, 70% of last week's volume in equity notes (indexes and exchange-traded funds only) was allocated to Europe or Japan. The rest was distributed between U.S. equity (20%) and gold or real estate (10%).

"There was a sell-off in the U.S. last week, but I'm not convinced that all these jitters would have pushed people out of the U.S. in such a short time. Retail investors are still looking at U.S. benchmarks, and you have to educate them a lot to go global or in alternative investments," the sellsider said.

"That said, we're seeing an increasing demand for non-U.S. deals. It may come from institutional investors. We know that in the general market, institutions and pension funds are allocating more in non-U.S. equity. They make up their mind and pull the trigger."

Japan tops

A likely example was last week's top offering.

Goldman Sachs Group, Inc. priced $90 million of 0% notes due Oct. 16, 2014 linked to the Topix index. The notes priced at 100.55. The payout at maturity will be par plus the index return. If that return is negative, investors will receive less than par.

"This obviously was an institutional deal," the sellsider said.

"When was the last time you saw a six-month retail deal? It would be short-term capital gain tax treatment, and retail investors want to avoid that for good reasons. But it's different for corporate accounts. Whether it's [a] short-term or long-term capital gain doesn't matter. They're taxed at the same rate.

"Each time you see a deal shorter than one year, on that fact alone you can almost pretty much say that it's not retail.

"The low fee of 44 basis points also suggests that it's not retail."

Even more Europe deals

The bid away from domestic equity into Europe can be observed when comparing offerings linked to the S&P 500 index with those linked to the Euro Stoxx 50 index.

During the Jan. 1 to April 11 period this year, agents sold $1.79 billion of notes linked to the S&P 500 in 251 offerings, or 15% of the total volume. It represents a 25% decline from $2.38 billion sold during the same time last year in 237 deals, or 22.5% of the volume, according to data compiled by Prospect News.

Meanwhile, the notional based on the Euro Stoxx 50 increased by 15% to $1.58 billion this year from $945 million last year. The number of offerings rose by 84% to 171 from 93.

The data is based on notes that are linked to the respective indexes excluding baskets or multi-asset underliers.

"I heard different people in the industry saying investors are increasingly using structured products, especially simple structures, as part of their core investment, which can include allocations in international equities and alternative betas, and I agree," the sellsider said.

"It certainly looks like the beginning of a trend to see growing interest in Europe. Probably investors are using structured products as an instrument for core investment to gain access into Europe."

Delta one

The Goldman Sachs deal linked to the Topix index was also representative of a new trend: investors showing some interest in tracker deals, which offer no optionality such as downside protection or leverage.

For this month alone, those structures represented 25% of the total volume in six deals.

"It's usually done for access. The Topix deal is a good example. There is an ETF on the MSCI Japan index, but it's a different index. There's no ETF on the Topix. The Topix is a broad-based Japanese equity index. It's broader than the Nikkei. If you want broad-based exposure to Japan, where are you going to get it? You want to go long this index. A structured note will give you easy access to it," the sellsider said.

He cited another factor.

"Right now, a lot of what's issued suggests that investors don't want to be capped. They look at deals not so much for the protection but for something that looks like a direct investment in the underlying. Structured products are not only about getting protection or getting leverage. Very often it's also about getting access to something that's hard to access either because there is no equivalent ETF like the Topix deal or because the issuer has put together a diversified basket of stocks which may be convenient or cost efficient to buy as a note," he said.

Steps

STEP Income deals were another popular structure last week.

The largest one, and the No. 2 deal of the week, was Barclays Bank plc's $37.92 million of 10% STEP Income Securities due April 24, 2015 linked to the common stock of Facebook, Inc. Interest is payable quarterly.

If the final price of Facebook stock is greater than or equal to the step level, the payout at maturity will be par of $10 plus the step payment. The step level is 110% of the initial share price, and the step payment is 5.9%.

If the final share price is greater than or equal to the threshold level, 95% of the initial share price, but less than the step level, investors will receive par.

If the final share price is less than the threshold level, investors will lose 1% for every 1% that the price declines below the threshold level.

BofA Merrill Lynch was the agent.

Barclays priced a similar deal also distributed by BofA Merrill Lynch in $21.98 million of 9% STEP Income Securities due April 24, 2015 linked to the common stock of Cabot Oil & Gas Corp. It was the fifth largest offering last week.

Barclays brought to market another Japanese deal in $26.26 million of 0% return enhanced notes due Oct. 23, 2015 linked to the Nikkei 225 index. The product offers two times leverage up to a 16.75% cap with no downside protection. It was the No. 4 deal.

In the leveraged buffered category, Credit Suisse AG, London Branch priced $15.5 million of 0% Buffered Accelerated Return Equity Securities due April 13, 2016 linked to the iShares U.S. Real Estate exchange-traded fund.

The deal, ranked No. 6, featured a 150% upside participation rate and a 10% buffer on the downside.

Equity on the rise

Equity-linked notes in general are even more popular this year than last year. Volume in equity notes has increased by 23% so far in 2014 to $10.16 billion from $8.26 billion last year. The asset class includes single stocks, baskets of stocks, equity indexes and ETFs.

With all the talk about an impending market correction after last year's 32% increase in the S&P 500, some sources said they do not expect equity to gain so much momentum. But they offered some explanations.

"Equity markets have been performing well until recently. That may be why," the sellsider said.

"The run-up last year caught many by surprise. But most firms believe that the market still has some upside for this year. Something around 10% is a typical call. While no one expects a 35% run, people remain pretty bullish," the market participant said.

The No. 2 agent last week after Bank of America was Goldman Sachs with $120 million in five deals, or 25.8% of the total, followed by JPMorgan with 12 offerings totaling $57 million, or 12.25% of the total.

"It's possible they may have wanted to do more deals in anticipation of the blackout." - A market participant on Bank of America's early-month push

"It certainly looks like the beginning of a trend to see growing interest in Europe." - A sellsider

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