Volume up 6% with investors turning to stock-picking, steering clear of indexes

By Emma Trincal

New York, Nov. 23 - Agents sold $309 million of structured products in 158 deals in the week ended Nov. 18, a 6.28% increase from the week before, when 67 deals priced for a $291 million total, according to data compiled by Prospect News that excludes exchange-traded notes.

"I'm not sure exactly why. Normally orders tend to skew toward the last part of the month, but this was still the first half," said a market participant.

"Some issuers might have put products out there for a week or two in the early part of the month.

"But the action is going to be this week and next," he said, talking on Wednesday.

Faced with uncertainty, investors paradoxically retreated from indexes, opting instead for deals linked to single stocks. Equity as an asset class however declined both on a monthly and weekly basis.

For the month, issuance was down 36% with $1 billion sold in 292 deals this month as of Nov. 18 compared to $1.57 billion priced in 301 deals during the same time in October.

Fewer big deals priced so far this month - only two offerings with a more than $50 million size were sold compared to six last month.

But issuance year to date kept its lead from last year with $38.07 billion sold in 6,136 offerings, a nearly 11% increase from $34.34 billion sold in 5,561 deals during the comparable period in 2010.

Stocks up, indexes down

Equities, as an underlying asset class, declined both for the week - down 10% - and the month - down 15.7%.

Investors showed little appetite for equity index-linked products, which saw their volume drop by 39% to $98 million last week from $161 million during the prior week.

For the month, the issuance of equity index-linked products fell by a third to $494 million from $746 million.

However, stocks soared, their volume up more than two-fold for the month - to $219 million from $102 million - and up 55% for the week to $94 million.

The market shares for stock deals, at 30.5% last week was almost the same as that of indexes at 31.8%.

"Maybe people want to avoid the financials that are in the indexes," said a structurer. "They may prefer to focus on industrials or consumer discretionary stocks."

"In this uncertain environment, going back to stock-picking may give investors a sense that they're more in control, that they can make more active choices," the market participant noted.

"If you focus on an individual names rather than on a broad index, you may have a better chance of a more positive outcome."

Big commodities deal

Commodities regained some traction last week with three deals totaling $44 million, or 14% of the total, compared to a less than 1% market share in the prior week.

Most of it came from the No. 1 deal of the week, Barclays Bank plc's $36.63 million of 0% buffered return enhanced notes due Nov. 21, 2013 linked to a basket of commodities and a commodity index. The basket included equal weights of Brent crude, platinum, copper and the S&P GSCI Grains Index Excess Return.

The structure offered a 1.85 leverage factor on the upside capped at 27.75%. There was a 20% buffer on the downside with a 1.25% leverage factor beyond the buffer for each point of decline in the underlying.

The deal was distributed by JPMorgan.

Trigger Phoenix, step-up

The volume of deals last week was down for leveraged notes whether those offered partial downside protection (down 65% to $8 million) or no protection at all (down 35% to $107 million).

"It could be because volatility is too high, although you will see data points showing high levels of leverage even when volatility is high," the structurer said.

Reverse convertibles continued to suffer, with their volume down 31% week over week

UBS' trigger phoenix autocallable optimization securities however did well.

Those notes are a type of autocallable in which the coupon may be paid without necessarily triggering a call.

If the underlying closes between a trigger price - which is below the initial price - and the initial price, investors get the coupon. If it closes above the initial price, the note gets called and the coupon is paid as well.

Most of those deals are very small in size, with UBS pricing 56 of those last week.

The exception was the second deal of the week, sold by UBS and issued by Royal Bank of Canada, which priced $25.08 million of trigger phoenix autocallable optimization securities due Nov. 26, 2012 linked to the common stock of Apple Inc.

If the price of Apple stock closed at or above the trigger price - 70% of the initial share price - on any of four quarterly observation dates, the issuer would pay a contingent coupon of 14.93% per year. Otherwise, no coupon will be paid for that quarter.

If the closing share price was greater than or equal to the initial price on any of the observation dates, the notes would be called at par of $10 plus the contingent coupon.

The fee was 1.5%.

"Investors like those deals if it's called early. And the bank likes it too because of the commissions," he said, adding that an early call also benefits the agent.

"It's a volume business. They make money on the rollovers," said a New York sellsider.

UBS' ability to price a lot of those deals in small sizes was seen as a plus for the investor, according to the market participant.

"They've been able to drive the size threshold lower using technology.

"That's a good thing from the customer's experience point of view.

"It gives you the ability to easily invest in those products if you have less than $200,000," he said.

Another type of structure, which does not fall into a particular category, was the "Step Income Securities," a Bank of America product the bank brings to market on a regular basis.

Bank of America Corp., with its $19.84 million of 11% STEP Income Securities due Nov. 28, 2012 linked to Ford Motor Co., priced the No. 3 deal last week.

If the price of Ford shares finished at or above the step level - 111% of the initial price - the payout at maturity would be par of $10 plus a step payment of 11.43%.

If the stock finished at or above 95% of the initial price but below the step level, the payout would be par.

Investors would be exposed to losses beyond the 5% buffer.

Interest was paid monthly.

The top agent for the week was Barclays, pricing eight deals totaling $57 million or 18.5% of the total. It was followed by UBS with $53 million in 93 deals and Goldman Sachs with four deals amounting to $48 million.

Goldman Sachs was the No. 1 agent the week before.

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