Investors show signs of bullishness, focus on global equity, but volume remains weak

By Emma Trincal

New York, June 20 - Equity issuance picked up last week, and there was a greater emphasis on global markets, according to data compiled by Prospect News.

Agents sold $343 million of equity-linked notes last week, up 3.7% from the week before. The asset class made for 84% of the total versus 73% during the previous week, according to the data.

Stocks contributed to the up tick the most, increasing by 10% from the previous week and representing 23% of the total. Equity indexes were up 3% and made for 61% of the total.

Sources placed last week's progress in the context of a market rally that saw the S&P 500 index post a 1.5% increase for the week.

For the month to date, however, equity was down by 47%.

"At the beginning of the month, we saw volatility increase, which helped pricing," a distributor said.

"Then with the market shooting up, people are getting more comfortable with equity deals.

"What could stall that would be if volatility continued to drop. Pricing would be stagnant again, especially for buffers."

Rates too low

The volume for all structured notes remained weak.

For the week-over-week volume, sales dropped by 9.5% to $410 million in 134 deals from $453 million in 100 offerings.

Despite the rally that began at the beginning of the month, the first half of June fared even worse compared to the same period in April with sales down 43% to $1 billion from $1.78 billion.

On a year-to-date basis, agents have priced $18 billion as of Friday, which is 15% less than the same period last year, when $21 billion was brought to market.

The data compiled by Prospect News does not include exchange-traded notes and certificates of deposit.

"Part of it is the rate environment," a New York sellsider said.

He compared the 1.66% yield of the 10-year Treasury on Wednesday with its 2.92% level a year ago. For the five-year Treasury, the yield fell from 1.51% last year to 0.73%.

"You have a minority of opportunistic buyers who say 'let's put money in the market anyway because rates will be lower' versus the strategic investors who say 'look at how low the rates are. Why should I invest anything long term if rates are so low?'" he said.

Regardless of investor sentiment, current market conditions do not facilitate pricing, this sellsider noted.

"It's harder to manufacture products in a low-rate environment," he said.

"The ability to buy the zeros, the options is linked to the tenor. You can decrease the buffer, you can decrease the participation. But the building blocks are the same, and you still have to play with it in ways that are not going to give you the most enticing terms."

One more positive figure was the 6% uptick in the monthly issuance volume so far in June compared to the first two weeks of June 2011.

"It's hard to explain why, and I don't think the increase is significant anyway. I guess it's probably seasonal. But the overall trend this year remains sluggish," the sellsider said.

Knock-outs rock

The top structures employed last week were knock-out notes (36% of the weekly volume) and leveraged buffered products (32%).

Preference was given to global equity indexes, which were used as components of the underlying baskets in larger offerings.

Knock-out structures typically provide investors with a high or even unlimited upside along with a contingent minimum above par if the index finishes at or above a barrier level, which can be either at or below the index's initial level. When the barrier is breached, investors lose the double benefit of the contingent protection and minimum upside. They are fully exposed to losses.

"Knock-outs allow bullish investors to express a view with a margin of error if there is a drop off. Even a slightly bearish investor can outperform. As long as the client is comfortable with the barrier, you'll see an interest in those products," the distributor said.

"Uncapped knock-outs are very popular," the sellsider said.

"As much as there is a lot of trepidation around Europe, people are reaching out for unlimited upside returns. All analysts have said that equity is the place to be. U.S. investors are still underinvested in equities, so anytime you see the potential for enhanced return, investors are going to bid on it."

The popularity of leveraged notes with a buffer or a barrier follows the same logic, sources said.

"Our clients are mainly bullish. We have a mix of single equity and bullish enhanced return notes. That's where the price is the most appealing. That's where the sweet spot is," the distributor said.

"There's a strong demand for capital-protected structures, but the terms are just not there right now."

Largest offerings

The top two deals last week were tied to baskets of global equity indexes with different weights.

Credit Suisse AG, Nassau Branch priced $58.49 million of 0% buffered return enhanced notes due July 3, 2013 linked to a basket of Asian indexes and their related currencies. The basket includes the Hang Seng index, the Korea Stock Price Index 200, the Hang Seng China Enterprises index, the MSCI Taiwan index and the MSCI Singapore Free index.

The deal offers two times leverage on the upside with an 18% cap, a 10% buffer on the downside and 1.111 times negative leverage past the buffer.

The deal No. 2 was HSBC USA Inc.'s $41.09 million of 0% notes due July 3, 2013 linked to a weighted basket of three buffered return enhanced components, which are the Euro Stoxx 50 index, the Topix index and the FTSE 100 index.

The deal offers two times leverage on the upside with a 22.8% cap applied at the basket component level. The 10% buffer with 1.111 times negative leverage past the buffer is also applied at the basket component level.

"This global equity theme is probably opportunistic buying," the sellsider said.

"Global markets have been pretty beaten down, and some expect them to outperform the U.S."

The distributor agreed.

"When there is blood in the street, that's when you want some exposure, and people are willing to get exposure as long as they have some protection," he said.

JPMorgan was the top agent last week. It priced 19 deals totaling $121 million, or 29.41% of the total. JPMorgan distributed the top five deals.

"They're busy right? They've got the name; they've got a lot of free publicity. ... Any publicity, good or bad, is good. They've got the machinery in place; their people are well trained; there's a lot of internal distribution. If you picture the six-cylinders engine, they've got those six guys between the name and the huge distribution channel," the sellsider said.

Following closely in second place was UBS with $118 million. Goldman Sachs was third with $87 million.

"Knock-outs allow bullish investors to express a view with a margin of error if there is a drop off." - A distributor

"This global equity theme is probably opportunistic buying." - A New York-based sellsider

© 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.