Dog days of August show growth compared to July, but sources say it's too soon to get excited

By Emma Trincal

New York, Aug. 15 - Issuance continued to be slow - volume was down 21.6% for the year through Aug. 11 compared to 2011 - but the monthly picture was a little rosier.

Agents sold $509 million from Aug. 1 through Aug. 11, a 66.5% increase from the same period last month when $306 million came to market, according to data compiled by Prospect News.

"The third quarter started off pretty good. People are getting their toes back into the water," a sellsider said.

"They are more comfortable when they see positive returns, and the market had a pretty good run."

Volume

However, volume for the month to date is down 59.6% compared to the $1.26 billion sold in the Aug. 1-11 period of last year, according to the data.

Last week saw sales plunge by 42% from the previous week: $252 million of notes priced last week versus $438 million the week before.

"It's in line with the same pattern that we've seen," a market participant said, which is that summertime is always quiet.

"July has been a very slow month. Just because August is significantly higher - and don't get me wrong, it's good thing - doesn't mean we have to congratulate ourselves too early," a structurer said.

Commenting on the 21.6% decline in sales year to date, this structurer said, "It's actually better than what I thought."

Agents have sold $22.12 billion in 4,994 deals so far this year, compared with $28.22 billion in 3,960 deals last year.

"This summer has been more slow than usual. Our clients tell us that it's the uncertainty around the elections," the sellsider said.

Compliance

For the structurer, the main problem is hard-to-understand rules.

He said that with very low interest rates, investors in certificates of deposit are inclined to go for fully protected notes. But since those products are also difficult to price due to low rates, more and more investors are willing to buy principal-at-risk products such as buffered notes.

"There is actually a demand for it. Brokers want to sell them and investors want to buy them. But the firm needs to approve them, and they don't get approved because the rules are just too confusing," he said.

"The biggest problem in this industry is the regulators. They don't understand the business. They come up with regulations and notices. Nothing gets done. That's why we have such a big decline," he added.

Asset classes, structures

Notes with a single stock as their underlying grew the fastest for the month to date. But the asset class is strongly lagging last year, down 45% and making for 20% of the total versus 29% last year.

Equity indexes on the other hand have increased. They are up 19% year to date in volume and have grown to 56% of the total from 37%.

"I think the decline in single stocks may have to do with retail investors having little to invest and trying not to put all their eggs in one basket. They're getting smarter and more cautious," the structurer said.

"Reverse convertibles are not a bad product, but for the man on the street, betting on the S&P is easier than picking a stock."

For the month to date, leveraged notes with partial downside protection remained the favorite play, but this structure saw its volume decline by 6%, dropping in market share to 35% from 63%.

Top two

The largest deal of the week was in the leveraged notes with partial downside protection category, Credit Suisse AG, Nassau Branch's $51.45 million of 0% notes due Aug. 28, 2013 linked to a weighted basket of three buffered return enhanced components.

The basket includes 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 19.2% cap and the 10% buffer apply at the component level. JPMorgan was the agent.

Callable reverse convertibles represented the fastest-growing structure this month. They have grown 4.5 times to $63 million from $14 million, and their market share increased to 12.5% from 4.5% of the total. Twenty two offerings priced in this category, and the largest one was the No. 2 deal of the week, Royal Bank of Canada's $40.11 million of contingent income autocallable securities due Aug. 15, 2013 linked to the common stock of Apple Inc.

The barrier is 80%, and a contingent payment of 3.18% is payable quarterly if the share price is above the barrier. If it is at or above the initial price, the notes will be called. At maturity, a decline of the share by more than 20% leads investors to full exposure to the losses and a payout payable in shares or in cash at the issuer's option.

The top agent last week was JPMorgan with 12 deals totaling $75 million, or nearly 30% of the total. It was followed by UBS and Royal Bank of Canada.

"Our clients tell us that it's the uncertainty around the elections." - A sellsider on why issuance has been slow

"The biggest problem in this industry is the regulators." - A structurer

© 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.