Stock pickers return to market; macro environment seen as too erratic to take bets on

By Emma Trincal

New York, March 16 - Stock-pickers re-entered the market last week, and the volume of notes linked to a single stock more than doubled from the week before, according to preliminary data compiled by Prospect News.

Issuers sold $277 million of stock deals during the week ended Friday, compared with $106 million during the prior week. Their share of the volume grew to 47% last week from 38% the prior week.

Volume overall declined 15% to $589 million from $694 million. These figures exclude large exchange-traded notes issuance, in particular Barclays Bank plc's $8 billion additional iPath S&P 500 VIX Short-Term Futures ETNs due Jan. 30, 2019, which priced on Thursday.

No global view

A sellsider said that the two trends - the increase in stock-linked issuance and the overall decline in volume - may be related to one factor: the overall uncertainty in global markets. Last week's news was dominated by oil jitters and the Libyan crisis. The Japanese earthquake had a much greater impact this week than last week because it occurred on Friday, the last day of the week.

"There's so much headline volatility and news risk between the Middle East, Libya and oil, people are not sure about what to do," said the sellsider. "They're waiting to see how the news is going to strike out. They don't have macro convictions about anything. If you don't have a macro view, you're going to pick individual stocks. People prefer individual companies to a macro theme because there's just too much uncertainty."

In addition, current market conditions are a better fit for short-term traders than retail investors, he said.

"Investors in structured products are long-term investors. Trading on high news risk is for active traders, hedge funds who can get in and out, not for individual investors."

Stock-pickers are back

A distributor predicted that stock-picking will be a continuing trend. At its root is the return of more experienced investors to the structured products market, he noted.

"We're back into individual equity or basket of equities. It will grow over the next year," this distributor said.

"People are back into the market, looking for yield.

"You have mature investors re-entering the market. They tend to have a more disciplined approach. They're stock-pickers taking a view on some equities."

For this distributor, last week up until Friday was a good week.

"Friday dropped off because of the earthquake. Everyone jumped into Treasuries in a flight to quality away from disaster. Despite that, we had a pretty healthy week. We did a lot of volume," he said.

Insignificant decline

Srikant Dash, global head of research and design index and portfolio services at Standard & Poor's, said that the diminished volume seen last week is not meaningful.

"You really have to look at the year-to-date figures," he said.

Issuance from the beginning of the year until Friday was $22 billion, up 60% from the $13.72 billion sold last year during the same period.

"That's the story. Week in, week out, things may change. People might focus on structuring, education or product development as opposed to issuance," said Dash.

In connection with the surge in stock deal issuance, deals linked to equity indexes decreased last week to $98 million, down from $366 million the week before.

On the other hand, rates-linked notes augmented to $127 million from $3 million the week before. This category of products does not include step-ups, fixed-to-floater notes or capped floaters.

Leverage remains the top structure with $95 million issued last week, or 16% of the total, according to data compiled by Prospect News.

But in a sign that some buyers are becoming more cautious, investors chose leveraged deals with partial protection ($86 million) rather than leverage with full exposure to downside risk ($9 million).

The gap between those two structures was smaller in recent weeks. In particular, some weeks indicated a strong preference for leveraged deals with no buffers, which was not the case last week.

Ford deal tops $185 million

The top deal of the week - excluding ETNs - was linked to a single stock.

AB Svensk Exportkredit priced $185.75 million of 9.75% STEP Income Securities due March 23, 2012 linked to the common stock of Ford Motor Co. via Merrill Lynch, Pierce, Fenner & Smith Inc. Interest is payable quarterly. Investors will earn a 3.45% step payment in addition to the coupon if the stock finishes at or above the step level of 109.75% of the initial price. They will get par if the stock finishes anywhere between par and the step level and will be exposed to any decline in the share price.

Merrill Lynch was the agent for another relatively big stock deal, which was the third-largest one for the week.

Bank of America Corp. priced $39.91 million 0% Strategic Accelerated Redemption Securities due March 20, 2012 linked to General Electric Co. shares. It is an autocallable with a 14.77% annualized call premium, quarterly observation dates and a 5% buffer.

The second-largest deal was a rate-linked note. Goldman Sachs Group, Inc. priced $45 million of 15-year callable CMS spread notes due March 21, 2026. The interest rate is 10% for the first year. After that, the rate is four times the spread of the 30-year Constant Maturity Swap rate over the two-year CMS rate, subject to a minimum rate of zero and a maximum rate of 10%.

Barclays was the top agent of the week given its $8 billion VIX ETN. The agent sold nine other deals totaling $31 million.

Looking at issuance excluding the $8 billion ETN, Merrill Lynch topped the league table with $257 million sold in six deals, or 45% of the total.

It was followed by JPMorgan with $93 million and Goldman Sachs with $54 million.

"There's so much headline volatility and news risk between the Middle East, Libya and oil, people are not sure about what to do." - A sellsider

"We're back into individual equity or basket of equities. It will grow over the next year." - A distributor

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