Volume declines to $271 million; stock, autocallable deals preferred

By Emma Trincal

New York, Oct. 27 - Agents sold $271 million last week in 45 deals in a week dominated by stock deals and autocallable structures.

Issuance in the week ended Friday declined from the week before both in volume - $450 million of non-exchange-traded notes priced during the prior week - and in number of deals - 88 deals versus 45, according to data compiled by Prospect News.

Unlike the week before, which saw six ETNs sold for a total of $1.65 billion total, the ETN supply was negligible last week with only $18 million sold in eight small deals.

Deals in the $10 million to $50 million category dominated last week with 10 offerings priced in this category.

Calm waters

As volatility was flat, investors looked for yield in single-stock deals rather than equity index-linked offerings.

Stock-linked notes saw their share as a percentage of total issuance increase to 42.5% from 8% week over week.

"It's a calm market. People are looking for volatility in stock deals," a New York sellsider said.

"They want some juice tapping into stocks that have been hit."

This sellsider said that the overall market has turned more bullish since September. The S&P 500 index has moved up by almost 9% since Sept. 1 but was flat last week.

"It's not as if you had a rally with stocks up 30%. Ain't the emerging markets.

"People feel better after the decent earnings. The global economy is not in a recession. But there's nothing to be cheerful about."

Reflecting investors' skepticism, equity index-linked notes lost their appeal, this sellsider said.

Their share dropped in absolute terms to $30 million from $323 million, according to data compiled by Prospect News.

Stocks first

"Investors have an incentive to do some stock-picking because the indexes are flat," the sellsider said.

"Volatility is very low, and that's a huge variable to build those structures," said Eric Greschner, portfolio manager at Regatta Research & Money Management.

"The implied volatility of indexes tends to be lower for obvious reasons. Investors have to go to individual stocks to get attractive coupons," he added.

Autocallables led as the top structure with $50 million sold in two deals, which represented 18.5% of the total volume, according to data compiled by Prospect News.

UBS was the leader in this category, selling the two products, one on the behalf of Deutsche Bank AG, London Branch and the other for itself.

The $27.21 million autocallable notes issued by Deutsche Bank offered on a one-year term a 21.39% call premium for a 70% trigger price. It was the top deal of the week, and the underlying stock was Anadarko Petroleum Corp.

UBS AG, London Branch priced a $23 million offering of autocallable securities linked to Apple Inc. with an annualized call premium of 16.5% and a trigger price of 80% of the initial price. It was the fourth-largest offering of the week.

The picture for reverse convertible was more of a mixed bag. The structure was the second most employed during the week with $44 million sold in 15 deals, but the volume plummeted compared to the $114 million sold the week before.

In market share, reverse convertibles held a good position with nearly 17% of the market.

Commodities exposure

Commodities amounted to 10% of the total, or $29 million, with one major deal prevailing in this asset class: Morgan Stanley's $18.88 million of 0% Commodity Leading Stockmarket Return Securities due Oct. 26, 2012 linked to the price of gold.

Additionally, investors looked for commodity exposure through stock plays. The top deal of the week - Deutsche Bank's $27.21 million autocallables linked to Anadarko Petroleum - is an example. While not classified as commodities-linked notes per se, those deals, which give investors access to commodities via a stock, suggest an unabated appetite for the asset class.

However, investors concentrated their picks on narrow themes, the sellsider noted.

"What's getting done in commodities right now is gold and oil," the sellsider said. "There's no agriculture, no other precious metals. No copper."

Deals linked to interest rates grew as a percentage of issuance compared to last week, but their volume remained stable at $25 million in one deal versus $24 million in also one offering during the prior week, according to data compiled by Prospect News.

The $25 million deal, ranked No. 3 in size, was brought to market by Freddie Mac. The variable-rate medium-term notes due Oct. 21, 2025 were based on six-month Libor.

Hybrid range accrual

Issuers' tendency to use the range accrual structure mixing rates and equity continued to be noticeable, confirming the recent appeal of those hybrid products among investors.

Citigroup Funding, Inc. priced $15.67 million of Libor and S&P 500 index-linked range accrual notes due Oct. 25, 2025. The coupon varies based on predefined levels of the S&P 500 and Libor. The notes are callable after one year.

"Some banks have lost money in those structures, and they're doing less of it. But others are jumping in. Looks like Citi is getting pretty involved," the sellsider said.

"When a bank's funding rates are not so great, they can offer attractive coupons.

"But it's not easy to hedge those hybrid deals. If Libor goes up, the bank can't pay the coupon and has to call the notes. They then need to un-hedge at levels that may not be attractive.

"That's how an issuer can lose money.

"It's not a bad bet for the investor though. He expects to get a 10% coupon on year one, a 7% on year two and a call after that."

Greschner said that the popularity of those structures grows when the stock market rallies.

"The equity component is very compelling. We get a lot of calls for hybrid range accruals, especially when equity markets accelerate. People don't want to miss out. They tell us: Hey, I want to be more aggressive, I want equity exposure.

"The need to participate in the equity rally completely explains why retail investors, financial advisers like those deals."

However, Greschner said that hybrid range accrual notes should be carefully analyzed prior to investing because a set of conditions pertaining to two different underliers makes the payout outcome more difficult to predict.

"The more variables you introduce, the more you reduce the odds of getting your payout," he said.

"You need to see how those deals are structured and what the probabilities are.

"There's risk. People don't understand probabilities and decision trees.

"What you really want is a structure as simple as possible."

Complex alpha

Simplicity is often preferred among advisers, but last week saw a couple of complex, algorithmic-based notes for investors seeking absolute returns.

This quest for alpha was reflected in two large deals.

JPMorgan Chase & Co. priced the second-largest deal of the week with $26.44 million of 0% return enhanced notes due Oct. 24, 2013 linked to the J.P. Morgan Alternative Index Multi-Strategy 5 (USD).

The underlying index provides exposure to a portfolio of absolute return strategies and aims to generate consistent positive returns with low correlation to traditional asset classes.

The second of these deals came from Deutsche Bank, which priced $18.97 million of 0% S&P plus tracker notes due Nov. 22, 2011 linked to a basket of indexes that includes the S&P 500 Total Return index and the Deutsche Bank Equity Mean Reversion Alpha index, also known as the Emerald index.

UBS No. 1

UBS topped the league tables last week, pricing $76 million in six deals totaling 28% of the volume.

"UBS is the first private bank in the world. They've maintained a strong image despite the tax evasion headline. The fact is, everybody has money at UBS," the sellsider said.

The second agent was Morgan Stanley with $49 million in three deals, or 18% of the total.

JPMorgan was next, pricing nine offerings amounting to $43 million, or 16%.

The week before, Barclays was first, followed by JPMorgan and UBS.

"It's a calm market. People are looking for volatility in stock deals." - A New York sellsider

"We get a lot of calls for hybrid range accruals, especially when equity markets accelerate. People don't want to miss out." - Eric Greschner, portfolio manager at Regatta Research & Money Management

© 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.