Issuance builds momentum; volume up 7.6% for year; Bank of Montreal prices $185 million deal

By Emma Trincal

New York, Dec. 18 - Market action slowed on Friday in anticipation of the Fed meeting this week, but structured notes agents had a busy week, selling $652 million in 92 deals, a 62% increase from the prior week.

However, a big offering made up almost a third of the volume. It was a deal that recurs every year in December and is issued by Bank of Montreal. It offers exposure to a basket of Raymond James picks.

A couple of weeks are left before the end of the year, and market participants are optimistic about the final picture for the year.

Volume this year up to Friday, Dec. 14, grew by 7.6% to $36.38 billion from $33.82 billion during the same period last year, according to data compiled by Prospect News.

The number of deals remained flat at 7,697, compared with 7,760 last year.

So far December is very strong with $1.06 billion sold in 225 deals, a 35.5% increase in notional compared to the same period in November, which saw $778 million priced, the data showed.

The improvement is even more noticeable from a year ago with sales in the Dec. 1 to Dec. 14 period last year at $715 million.

Year not over yet

Sources said that the bulk of this month's issuance should occur this week (ending Dec. 20) or even next week.

"There's more to come," said Jim Delaney, head trader at Market Strategies Management.

"The last week of the month could be next week after Christmas as you could still get a Dec. 31 settlement," he said.

Delaney said that he expects 2013 to end up on a very positive note.

"Volume will be up even more because investors are feeling more confident," he said.

"They saw the value of their portfolio rise. The value of their homes has been going up a lot too. There's clearly a wealth effect, and the perception of increased wealth is real. Household net worth is back to its 2007 levels. That's significant.

"Structured notes are primarily retail-oriented products, and people have money to invest. You have more demand for structured products, and naturally, sellside firms can always adjust supply to meet demand."

Andrew Valentine Pool, main trader at Regatta Research & Money Management, said that increase in volume this year does not surprise him.

"We bought a lot in the middle of the year and the fall," he said.

"Once we had the pullback in May after the Fed talked about tapering, we actually bought a lot more. There was a short-term pullback, but we were correct in anticipating that the market would go back up again. Our firm has bought more structured notes this year than any other year.

"While volatility was low this year, the bull market has been a driving issuance to higher levels."

Atypical deals

Last week saw four deals over $30 million in size with unexpected asset classes and less commonly used structures.

The biggest one was Bank of Montreal's $185 million of 0% senior medium-term notes, series B, due Dec. 19, 2014 linked to Raymond James Analysts' Best Picks for 2014. The firm issues the same deal each year in December when the equity research department at Raymond James & Associates, Inc. identifies its best buys for the next 12 months. The structure is a tracker. BMO Capital Markets Corp. was the agent but received no fee. Raymond James is acting as distributor and received 2.75% as the notes priced at 102.75.

A year ago, Bank of Montreal priced the same deal tied to the best picks for 2013 for $100 million. The notional increase by almost two-fold led some to conclude that appetite for research-based picks is growing. Yet many considered the 2.75% cost quite high.

"It's an interesting basket for companies that benefit from a recovery. You have manufacturers, even human resource names," Pool said.

"We often see 2.5% on the prospectus, but we try to get 97 or 97.5 basis points. It's a little bit on the higher side. You're going to pay almost 3% for holding some strong names. I want more than just a number of recommended stocks. It saves you time if you want to avoid doing it yourself, but for a tracker, it's a little pricey."

Raymond James picks

Delaney said that studying each of the 13 stocks and analyzing their past performance versus the benchmark may be too time-consuming for the small investor.

"While 2.75% is certainly not cheap, using the notes could be an inexpensive way for retail investors to beat the market," Delaney said.

"You're investing in the talent of the Raymond James analysts. This note has been around for a while now. If they did $100 million last year and the size has increased to $185 million this year, obviously it's got to be good enough that more people are buying it.

"There are two components behind this huge size. One is the Raymond James analysts versus the S&P. The other is the fact that the S&P itself is up more than 25% this year. People are looking for ways to find more interesting stocks," he said.

A derivatives market participant said that the deal is overpriced but that some investors may find it useful.

"It's definitely a substantial sized deal," he said.

"But it sounds like an expensive and clunky ETF. It doesn't give you any optionality, no return enhancement and no downside protection. You only get a straight one-for-one, and you're giving up liquidity for one year. For a fee of almost 3%, it doesn't make sense except for the ease of use.

"I guess for a smaller retail client who doesn't have enough money to speculate on individual stocks, it probably has some appeal. If someone believes it's too difficult or expensive to buy the basket, that's their choice."

Big commodity deal

Given this large offering, the top structure last week was delta-one products, which represented 31.25% of the total in four different deals, according to the data. For the same reason, notes linked to baskets of stocks, making about a third of all the notional, were the most popular.

Commodities-linked issuance grew last week to $74 million from only $11 million the week before. For the year, this asset class has been declining the most, down 33%.

Last week's high volume in commodities was also deal-related.

BofA Merrill Lynch priced $67 million of floater notes due Feb. 2, 2015 linked to the Dow Jones-UBS Commodity Index Total Return 2 Month Forward on the behalf of AB Svensk Exportkredit.

It was the second largest offering of the week. The coupon is equal to Libor flat and reset quarterly but is payable at maturity. The payout at maturity, in addition to interest, will be par plus triple the sum of the index return minus the Treasury bill yield minus a fee of 0.37% per year. The notes are putable. They will be automatically called if the index closes 15% below its initial level.

"I can understand the size because the asset class has been underperforming a lot," said Pool. "I do think that commodities need to see a bottom because the world economy is growing. But I'm just not going to call the bottom."

UBS AG, London Branch priced the third largest deal with its $45.2 million of 0% callable exchangeable securities due Dec. 15, 2020 linked to the common stock of Ensco plc. It is a fully principal-protected product with the payout based on an average of conversion values.

Equities

A more traditional structure and the No. 4 product for the week was an autocallable reverse convertible brought to market by JPMorgan Chase & Co. in its $33.07 million of contingent coupon callable yield notes due Dec. 12, 2017 linked to the S&P 500 index, the Russell 2000 index and the iShares MSCI EAFE index fund.

The notes pay a contingent quarterly coupon at an annual rate of 8% if each component closes at or above its 60% coupon barrier level on the observation date for that quarter.

The payout at maturity will be par unless any component finishes below its knock-in level, 60% of its initial level, in which case investors will receive par plus the return of the lowest-performing component.

The notes are callable at par on any interest payment date other than the final date.

There were very few large equity-index linked notes deals in the market last week, which Prospect News defines as products solely tied to equity indexes, excluding ETFs. Defined as such, equity indexes-based volume made for only 7% of the total, a much lower volume than usual. The average for the year is 55%. Those deals, however, tend to price at the end of the monthly cycle, and sources expect to see them pricing this week or next.

Single stocks on the other hand made for more than a third of the volume last week with $219 million sold in 63 deals. The top one, and the No. 5 issue of the week, was Deutsche Bank AG, London Branch's $29.11 million of 7.5% STEP Income Securities due Dec. 29, 2014 linked to the performance of Ford Motor Co. share.

If the price of Ford shares finishes at or above the step level - 107.5% of the initial price - the payout at maturity will be par of $10 plus 5.85%.

If it ends at or above the initial value but below the step level, the payout will be par.

Investors are fully exposed to any losses.

The agent was BofA Merrill Lynch.

The top agent last week was BMO Capital Markets Corp. with its single $185 million deal.

It was followed by Bank of America, which priced four deals totaling $120 million, and by UBS with $112 million sold in 46 offerings.

"Our firm has bought more structured notes this year than any other year." - Andrew Valentine Pool, main trader at Regatta Research & Money Management

"People are looking for ways to find more interesting stocks." - Jim Delaney, head trader at Market Strategies Management

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