Volume surges 25% in March to $3.86 billion, leading to hopes that market is at turning point

By Emma Trincal

New York, April 4 - Last week's issuance was robust and marked a turning point, according to a sellsider commenting on the heavy volume of sales.

"Most of Bank of America deals close at the end of the month, so it's always the best week," he said.

"Still, I think overall March gives some ground for optimism."

Agents sold $1.91 billion of non-exchange-traded notes during the week ended Friday through 285 offerings.

Bank of America Merrill Lynch contributed to 49% of the sales with $932 million in 25 deals, more than four times the amount priced the week before.

The week itself accounted for nearly half of the $3.86 billion sold in March.

With such impetus, March is very much ahead of February. Volume is up 24.5% from $3.10 billion last month.

However, issuance is still lagging compared to last year's first quarter, according to the data. That's mostly because March 2011 was a very strong month with $4.44 billion of sales.

Issuers priced $9.86 billion of notes during the first quarter, down 27.5% from $13.61 billion priced in the first three months of last year.

Investor sentiment

"I think March pick-up is encouraging, but a lot will depend on the performance of the market," the sellsider said.

"It's really the investors' sentiment that dictates volume. Most retail production is still a bet on the positive direction of the market.

"I think what drives this March volume is an increased optimism. People have seen equity prices go up. They're now afraid of missing the rally. ... Despite uncertainty, stock prices continue to rise.

"Enough clients have seen this rally. They may have made allocations back into the equity market. That's the most important reason for this resurgence of structured products in March."

For the month, equity sales amounted to $2.77 billion, up 25% from $2.22 billion in February.

But other asset classes grew as well, in particular commodities, which rose by 47.5% to $349 million from $237 million.

Rates products - excluding lightly structured products such as step-ups or fixed-to- floaters - grew by 145% to $77 million from $31 million.

Interest rates ordeal

Not everyone, however, shares the sellsider's optimism.

"The bulk of last week came from the Merrill Lynch internal channel," a market participant said. "But our business has been flat, and I anticipate the year to be flattish too.

"I don't see anything that makes me say that it will be a break-out year just because of where the rates are and volatility being so low.

"While I can't predict volatility, if the Fed is taken at face value, the rate part will stay low."

Low interest rates may make the pricing of some structures difficult, in some cases nearly impossible. However, it can have a positive impact on sales, the sellsider said.

"Interest rates continue to be near zero. There are certain risks associated with fixed-income portfolios. There's not enough yield, and that's another incentive to go back into equity markets," the sellsider said.

"Many structures offer some kind of downside protection whether through a hard buffer or a contingent protection.

"So anything that gives investors an opportunity to boost yields via an equity exposure without all the risk associated with equities will have some appeal."

Pure leverage

Structures offering leverage with partial downside protection made for 18% of the monthly total versus 12% for pure leverage plays, according to Prospect News data.

However, last week was skewed toward pure leverage offerings in part due to the large contribution of Bank of America Merrill Lynch deals to those products.

The third and fourth largest offerings last week, which were both sold by Bank of America Merrill Lynch and tied to the S&P 500 index, offer a three-times leverage factor with a cap on the upside and full exposure to losses.

The first one was Bank of America Corp.'s $79.53 million of 0% Accelerated Return Notes due March 28, 2014 linked to the S&P 500 with a 25.4% cap.

The other, issued by Barclays Bank plc, was a $77.96 million issue of 0% Accelerated Return Notes due May 31, 2013 linked to the S&P 500 with a 14.19% cap.

"These are bullish trades. For investors who don't think the market has run up too much yet, it makes sense to give up the downside protection for a higher cap or more leverage," the sellsider said.

Dual directional, trackers

Twin-win products remained popular structures, the sellsider noted.

"Issuing banks allow investors to participate in the upside and also to get a positive return on the downside within certain limits," he said.

"That's an example of a successful interaction between banks and their clients, with issuers becoming a little bit more in touch with investors' sentiments.

"There's always an effort to understand what clients want. But between getting the information, filtering it and putting together the product, it's often hit and miss."

The top deal in this category was Morgan Stanley's $33.45 million of 0% dual directional trigger securities due March 31, 2014 linked to the common stock of Apple Inc.

The upside cap is 50%, and the trigger level above which investors will get the absolute value of the stock price decline is 75%.

Pure trackers continued to be in favor, perhaps due to the simplicity of the structure, which gives investors exactly the return of the underlying without any leverage or return enhancement.

Those products represented 10% of the sales last week.

An example was the second largest offering of the week and also the No. 2 deal for the year: Goldman Sachs Group, Inc.'s $100 million of 0% commodity index-linked notes due April 10, 2013 linked to the Dow Jones - UBS Commodity index.

Bank of America priced the largest deal of the year so far last week, a $121.13 million issue of 10% STEP Income Securities due April 12, 2013 linked to Ford Motor Co. shares. Interest is payable quarterly.

If the price of Ford shares finishes at or above the step level - 110% of the initial price - the payout at maturity will be par of $10 plus a step payment of 4.51%.

If the final share price is greater than or equal to the initial price but is less than the step level, the payout will be par.

Investors are fully exposed to losses.

After Bank of America Merrill Lynch, Goldman Sachs was the No. 2 agent with $209 million in 11 deals, or nearly 11% of the total.

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