Volume increases 56% to $436 million last week; lag narrows for year and month

By Emma Trincal

New York, April 17 - Volume grew 56% last week to $436 million from $280 million the previous week, according to data compiled by Prospect News, partly due to a larger deal sold by BofA Merrill Lynch.

For the month, the gap in volume from March narrowed significantly compared to a week ago. Agents have sold $716 million this month as of April 13, a 5.2% decline from the same period in March, which saw the pricing of $755 million. A week ago, the month-to-month comparison showed a 58% decline.

Volume year to date is now only down 2.75% from last year. Issuance is $10.65 million this year, compared to $10.95 million last year, according to the data.

Perceptions about the pace of issuance varied, however.

"We didn't see a whole lot on our side last week. I don't know why, and that's part of the problem - we don't know," a distributor said.

"We're actually quite busy, and we have been for the last couple of months," a sellsider said.

"I'm optimistic, and I'm probably one of the few people to be in the industry.

"Education and training of the salesforce are going to drive more volume and growth. We have a training program, and every registered person is required to take it. I think it's a good idea. It's an eye-opener. Financial advisers are reluctant to sell because they think structured products are mysterious things. A lot of them even think that it's too good to be true, that it's got to be risky. They'd rather stay away from it. But when they understand it, they realize that it's not that exotic or mysterious.

"Once financial advisers get comfortable enough to be able to talk to clients, they are more apt to use structured notes, and I'm convinced it should translate into more activity and volume."

Big and small

The top deal - sold by BofA Merrill Lynch - was Barclays Bank plc's $121.61 million of 8% STEP Income Securities due May 23, 2014 linked to the common stock of Ford Motor Co. Interest is payable quarterly. If Ford stock finishes at or above the step level - 108% of the initial price - the payout at maturity will be par of $10 plus a step payment of 7.52%.If the stock finishes at or above the initial share price but below the step level, the payout will be par. Otherwise, investors will be exposed to any losses.

There were three deals in excess of $50 million last week versus none the week before.

At the same time, a noticeable number of deals of $5 million or less priced last week, making for 20% of the volume. UBS priced 51 of those 96 offerings, followed by RBC with 17 deals. JPMorgan and Barclays did 12 and eight deals, respectively. Less common agents were Credit Suisse and Goldman Sachs with three issues each. HSBC and Morgan Stanley did one deal each as well.

"I'm noticing that on the capital markets side, people are doing more and more third-party issuance," the sellsider said.

"UBS is doing a lot of those tiny deals, but others like JPMorgan are also doing more than before.

"I think it's because there is a lot of demand for high-credit counterparties, and firms like JPMorgan are looking for higher rated issuers like Royal Bank of Canada."

RBC issued 16 out of the 96 deals in that size range last week, according to the data.

Stocks, indexes

One trend for the week and the month was the relative growth in stocks and decline in equity indexes, or the narrowing of the gap between the two asset classes. Typically, equity indexes account for more than half of the volume and stocks tend to be less than a quarter on a yearly basis. But last week, stocks and indexes were split in a more even mix with stocks accounting for a greater share of the total (47%) than equity indexes (38%). For the month, stocks and indexes were equally split with 40% of the total each.

"It's interesting because I'm noticing the opposite. I see the business much more weighted in index-linked products than individual securities," the sellsider said.

"It could be one or two bigger deals out there, like the Ford deal last week."

Single-stock issuance represented so far this year 22% of the total versus 54% for equity indexes, according to the data.

"Demand for individual stock-linked notes has dropped because those products haven't been that attractive as volatility has been steadily moving down," the sellsider said.

"Most single-stock products are volatility-driven and offer better coupons when volatility is high. Either you accept the lower yield or you have to take more risk. It's smart to stay away from those products right now. You shouldn't be a seller of volatility when volatility is low. There will be a better time for these structures.

"But it's a catch-22. When volatility spikes, people retreat to the sidelines and it's hard to convince them to buy those products."

Buffers for rally

Leveraged notes continued to be popular. Last week saw $91 million of leveraged notes with no downside protection sold in six offerings. Leveraged notes with buffers or barriers totaled $80 million in nine deals.

JPMorgan Chase & Co. priced the second-largest deal of the week with its $41.73 million of 0% enhanced participation equity notes due Oct. 14, 2014 linked to the Euro Stoxx 50 index.

The payout will be 1.82 times any gain in the index with no cap. Investors are fully exposed to the downside.

The third-largest deal was sold by JPMorgan. It was Credit Suisse AG, Nassau Branch's $39.09 million of 0% return enhanced notes due May 1, 2014 linked to the MSCI EAFE index. It offers a 1.5 times leverage factor on the upside and 1.11 downside leverage beyond a 10% buffer. The upside cap is 10.8%.

U.S. equity markets continued to break new records last week. The S&P 500 surged above 1,593, breaking the October 2007 record of 1,576.

The market rally should entice investors to seek hedges in structured notes, but it has not been the case, the sellsider said, noting that leveraged notes with partial or full downside protection were an effective but insufficiently used hedge.

"The market last week reached historic highs. We should see more volume because in theory when the market is high, people should be more interested in harvesting gains. It would make sense to cash in your equity exposure into a note that gives you some downside protection. But instead, people are holding on to their long positions without hedging the risk. They get comfortable riding the rally," he said.

While leveraged deals get priced and sold, this sellsider said that the market should see more.

"I hope people start to see the benefits of these products as hedging tools. You can get equity exposure, but you can also change the risk profile and reduce your downside risk," he said.

"You can even use leverage with stocks that have been declining like Apple. It's a way to keep the exposure and give yourself some downside protection with on top of that the potential to recover more quickly if the stock bounces back. It makes sense to swap out of the direct stock exposure into a note. You gain that downside contingent protection and get the benefit of leverage if the stock happens to go back up. It gives you a better chance of recovery."

Other popular structures included the STEP Income note, such as the one used with last week's top deal, according to the data.

Additionally, demand remained high for trigger notes offering a contingent minimum return. One example was Barclays Bank's $12.67 million of 0% contingent buffer enhanced notes due May 1, 2014 linked to palladium. If the price of palladium finishes above the 80% buffer, investors will get the greater of the asset return and 3.1%, subject to a maximum return of 12%. If the final price is less than the barrier level, investors are fully exposed to the decline from the initial level. JPMorgan was the agent on the deal.

BofA Merrill Lynch was the top agent last week with 30% of the volume in two deals, one of which was the very large $121 million top offering. It was followed by JPMorgan and UBS.

"We didn't see a whole lot on our side last week. I don't know why." - A distributor

"It's smart to stay away from those products [single stock-linked notes] right now." - A sellsider

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