January volume outpaces December but lags last year by nearly 50%, making forecasts difficult

By Emma Trincal

New York, Jan. 25 - The first three weeks of the new year revealed a mixed picture, making trends difficult to identify or too soon to interpret, sources said.

Agents sold $275 million in 102 deals last week, down more than 25% from the $371 million priced the week before in 129 deals, according to data compiled by Prospect News.

With $1.35 billion sold from Jan. 1 to Jan. 20, volume rose 7% compared to the same period of last month.

Year-over-year

On a year-over-year basis, however, the picture is negative. This year's volume is 47% less than the $2.54 billion sold in the first three weeks of January 2011.

The data does not include exchange-traded notes.

A sign emphasizing the contrast between this year as of Friday and 2011 is the difference in deal sizes. There were 14 deals in excess of $50 million from Jan. 1, 2011 to Jan. 20, 2011 but only three this year as of the end of last week. The number of deals over $10 million dropped to 38 this year to date from 65 last year.

"The No. 1 difference compared to last year is that Europe is weighing heavily on the minds of U.S. investors while last year, you didn't have that problem," a sellsider said.

"One day you hear that there is a resolution for Greece on the table. The next, you hear that there's still no deal. The market is trading on the news.

"Something more solid needs to come out of Europe for investors to feel more comfortable."

A distributor said the figures for this month can't show the complete picture.

"It's too soon to tell," this distributor said.

"Deals are not closing out until today, tomorrow. If you're taking a snapshot based on last week, the bulk of issuance still has to come. On Friday, you'll have a much better picture," he said.

Figures compiled by Prospect News do not take into account lightly structured structures such as step-ups, fixed-to-floaters and capped floaters.

"We've done tons of step-ups. Overall, we'll start to see more pickup in the next couple of months," the distributor said.

Weekly, monthly

The 25% decline from last week was partly attributed to the round of earnings announcements.

"We're in earning season, and some investors in registered notes use products as tactical plays and are not going to be exposed to sudden price moves," the sellsider said.

"They want to see if there is going to be a trend behind the short-term fluctuations.

"When you buy a one-time downside, three times up with a 10% protection on the downside, it's a bullish play. You want to buy that when you are convinced that the earnings are an accurate bullish signal for the overall market. At least that's what conservative investors do, and most of the retail market is made of risk-averse investors."

Seasonal and market factors explained the slight uptick on a month-to-month basis.

"Usually December is a slower month for investors versus January when everyone is back from vacation. So I think it's seasonal," the sellsider said.

"We've seen somewhat of a recovery in the equity market, but people are somewhat still skittish.

"The CD business is down this month as the low rates make sales very difficult in that space."

Equity prices have climbed in the past few weeks, with the S&P 500 index up 4.5% since the beginning of the year.

The distributor said that the rally is a factor behind the improved issuance compared to December.

"People are more comfortable in the market. There is more confidence in equity," he said.

"Volatility has dropped so much. In December it was in the high 20s. Now it's below 20. It's a mixed bag because some structures are now less attractive. But overall, the psychological impact of the rally has been beneficial. It has led some investors to re-enter the market."

Autocallables

Autocallable notes were one of the most popular structures last week. They made up about a quarter of the volume and increased 38% from the week before.

The top deal of the week fell into that category, JPMorgan Chase & Co.'s $29.97 million of 0% review notes due Feb. 6, 2013 linked to the S&P 500.

The notes will be automatically called at a 12% annualized premium if on any quarterly review date the index is at or above its initial level. The structure offers a 10% buffer, but losses are compounded by 1.11% beyond it.

"These autocallable notes are increasingly popular. We're doing many of them. I think it's because people are becoming more educated on these products. They understand them better," the distributor said.

Other structures

Reverse convertibles declined by 11% for the week but staged a recovery month over month. Their volume is $90 million in January, a 36% increase from December.

Royal Bank of Canada priced $21.19 million of 10.54% trigger yield optimization notes due Jan. 28, 2013 linked to the common stock of Halliburton Co. It was the No. 2 deal and the top reverse convertible offering.

The downside threshold is 70% of the initial price. UBS Financial Services Inc. and RBC Capital Markets, LLC were the agents.

Leveraged deals with partial downside protection were on the rise on a weekly basis (up 48%), monthly basis (up 36%) as well as year to date (up 22%).

The top deal in this category and the third largest one for the week was brought to market by Credit Suisse AG, Nassau Branch. This issuer priced $16.82 million of 0% notes due Feb. 6, 2013 linked to a weighted basket of three buffered return enhanced components including the Euro Stoxx 50 index with a 55% weight, the Topix index with a 23% weight and the FTSE 100 index with a 22% weight.

The deal offers double the weighted average composite returns, if positive, of the basket indexes subject to a maximum return of 21.3% for each index. There is a 10% buffer for each index.

In general, investors have continued to prefer equity indexes over single stocks.

Stocks last week represented 21% of the total against 50% for equity indexes. Indexes grew by 34% while stocks declined by 41%.

On a monthly basis, while stock-linked notes rose by 18%, equity indexes rose by 60%.

The same pattern is also true for the year: both stocks and equity indexes fell from a year ago. But the 75% drop seen with stock underliers was significantly more than the 14% decline observed with equity indexes.

"For the most part, the masses at this point after seeing companies like Kodak filing for bankruptcy will continue to focus on indexes and stay away from stocks," the sellsider said.

JPMorgan was last week's top agent with 13 deals totaling $104 million, or 37.71% of the total. It was followed by Goldman Sachs with 16.52% of the total and by UBS with 15.44% of the total.

"Usually December is a slower month for investors versus January ... so I think it's seasonal." - A sellsider

"These autocallable notes are increasingly popular." - A distributor

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