Volume down 50% last week after strong monthly start; European woes weigh on bids for products

By Emma Trincal

New York, May 16 - Structured products issuance volume dropped by more than half to $219 million last week compared to $446 million in the first week of May, but sources said that it was not a surprise given the unusually busy start of the month.

The drop was also a result of European headlines, which continued to weigh on equity markets last week, pushing down structured notes issuance, sources added.

Trending down

On a month-to-date basis, volume at $556 million was up 2.27% from the same period in April, according to data compiled by Prospect News, with the uptick attributed to the week of April 30 to May 1.

For this month to date compared to a year ago, sales also rose by 4.61%.

But activity on a year-to-date basis remains disappointing with $13.58 billion sold so far, a 22% decline from last year, the data showed.

Meanwhile the number of offerings year to date has increased to 3,303 so far this year from 2,416 last year, reflecting the tendency to price smaller deals.

Sources had several explanations for the contrast between a solid first week and a depressed activity seen on the following week.

"With all the action in Europe and the equity market down 5% from its recent peak, investors' confidence is falling off a little bit. That's why you see less volume," an industry source said.

The S&P 500 peaked this year on April 2 at 1,419. The benchmark has lost nearly 6% since then. The last peak occurred on May 1 at 1,405.82.

For others, the year so far has just not been so good.

"It's been sluggish since January," a sellsider said. "Now that we're in correction mode it's not going to get any better. Things look pretty ugly as Greece is about to exit the euro," he added.

Pre-elections, post-elections

Stock prices fell more than 1% last week, after the double election on Sunday of a new president in France and a Greek parliament. The VIX index which measures implied volatility on S&P options surged by 4% at the end of the week.

Sources cited two reasons behind the unusually robust first week of May, making last week's numbers pale in comparison.

First, the week began on April 30, which is still the end of last month. Twenty-six offerings totaling $192 million priced on that single day. The overlapping of the end-of-April calendar into the first week of May skewed the data, sources said.

The other factor was the spike in volatility seen on Friday, May 4, which led to a pricing frenzy, according to sources. Agents sold 50 offerings on that day alone totaling $249 million, or 56% of the week's volume in just one day, the data showed.

But May 4 was not an ordinary day in the market, sources said, pointing to a selloff triggered by disappointing job data in the United States. The VIX spiked 9% while the S&P 500 tumbled by 1.6% on that day.

"You had a lot of volatility in anticipation of the European elections and fears around a Greek default," said the sellsider. "That's probably why so many deals priced at that time."

Michael Iver, founder of iVerit Consultancy, had another explanation for last week's disappointing sales activity.

"The overall reduction of volume last week reflects the Facebook effect in that a significant allocation of the shares of the largest IPO in history will go to retail," he said.

"Individual investors were probably more focused on getting shares in the IPO than anything else."

Autocallable push

Stocks have been growing faster than equity indexes for the month to date, according to the data pertaining to underlying asset classes.

Sources said that the trend may very well have to do with the monthly calendar, which sees more and bigger equity benchmark deals than the earlier part of the month.

Autocallable notes represented the most popular structure employed last week, according to the data.

"Volatility spikes make for ideal market conditions. They may price well or it may simply be an issue of supply and demand," said Suzi Hampson, structured products analyst at Future Value Consultants.

Agents sold five autocallable offerings last week totaling $53 million or nearly a quarter of the total weekly volume and triple the amount of notes in that structure type priced the week before, according to the data.

Part of this result was due to the No. 1 and No. 3 deals of the week, both falling under this category.

Barclays Bank plc priced $35.27 million of 0% Strategic Accelerated Redemption Securities due May 31, 2013 linked to Apple Inc. shares. The annualized call premium for this top deal of the week was 23.26% achievable on three observation dates.

The deal offered a 5% buffer at maturity.

Bank of America Merrill Lynch was the agent.

The second largest autocallable and third deal of the week was brought to market by Royal Bank of Canada, which priced $16.89 million of 0% buffered autocallable optimization securities due May 17, 2013 linked to the S&P 500 index. If the index closed at or above the initial level on any quarterly observation date, the notes would be called at par plus an annualized call return of 9.36%. The buffer was 5%.

UBS Financial Services Inc. and RBC Capital Markets, LLC were the agents.

Second-, fourth-largest deals

Step-up notes, which are sold by Bank of America Merrill Lynch, continued to be in demand. The second largest deal was AB Svensk Exportkredit's $18.47 million of 9% STEP Income Securities due May 24, 2013 linked to the common stock of Ford Motor Co. If the stock finished at or above the step level, 109% of the initial price, the payout at maturity would be par of $10 plus a step payment of 6.75%.

If the stock finished at or above the initial share price but below the step level, the payout would be par. Below the initial price, investors were fully exposed to losses.

The volume of leveraged buffered notes declined last week. But on a month-to-month basis, leveraged notes with partial downside protection more than doubled compared to the same period in April.

The fourth deal last week fell into that structure type. It was brought to market by Royal Bank of Canada as $12.65 million of 0% buffered equity index-linked notes due March 7, 2014 linked to the S&P 500 index. A 10.15% digital payout was offered if the final index level was at least 80% of the initial level. If not, investors were to lose 1.25% for every 1% decline beyond the 20% buffer.

RBC Capital Markets, LLC was the agent, and Goldman Sachs & Co., the underwriter.

Bank of America topped the league tables last week with only two deals totaling $54 million or 24.5% of the market.

It was followed by Goldman Sachs and by UBS.

© 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.