Agents price $314 million in first week of March; investors focus on energy picks, Euro Stoxx

By Emma Trincal

New York, March 11 – Agents sold $314 million in 85 deals in the week ended Friday, kicking off March at a weaker pace than in January ($400 million in the first week) and February ($410 million), according to data compiled by Prospect News.

For the year, however, volume remains up, increasing by 13% to $9.06 billion as of March 6 from $8.02 billion at the same point last year.

Investors demonstrated a greater appetite for the euro zone benchmark, the Euro Stoxx 50 index, last week than for the U.S. large-cap index, the S&P 500 index. Agents priced $97.6 million of notes linked to the Euro Stoxx 50 versus $10.3 million linked to the S&P 500. There were six Euro Stoxx 50 deals, compared with only three S&P 500 deals.

“The Euro Stoxx works well compared to the S&P. One reason is the higher dividend. You get more than 3.5% in dividend versus less than 2% for the S&P. That means the call options are cheaper on the Euro Stoxx and the put options more expensive. With that you get better terms,” explained Tom May, partner at Catley Lakeman Securities.

“When you buy an S&P forward, you’re not getting the dividend. So you have to discount that, and that’s why the forward price is lower, therefor the call option is cheaper. The puts will be more expensive for the same reason: you’re discounting the forward value compared to the asset price.”

He noted another reason why “the Euro Stoxx notes look a lot better” than the S&P products: “U.S. interest rates are higher than European interest rates. That also helps pricing.”

May said that the bullish bet on the euro zone on the part of U.S. investors surprises him.

A mess

“Europe is a little bit of a mess. Greece had its elections and is still negotiating its debt. Nothing has been fixed. France is a mess. Spain is a mess. That’s probably why the Euro Stoxx has a lower valuation than the S&P. People are attracted to the lower value, but there is a reason for it,” he said.

“Also, the Euro Stoxx only has 50 components versus 500 for the S&P. It’s a more risky index.”

Volatility can impact the upside pricing.

“The higher volatility is good for the cap structure but not for the leverage,” he said.

The top “European” deal and the third in size last week was Bank of America Corp.’s $35 million of 0% Leveraged Index Return Notes due Sept. 9, 2016 linked to the Euro Stoxx 50. It offered 1.45 times leverage with no cap and no downside protection.

Barclays Bank plc priced the No. 4 deal with $23.08 million of 0% capped leveraged buffered notes due Nov. 7, 2016 also linked to the Euro Stoxx 50. The leverage was 1.5 times any index gain, up to a 24.15% cap. There was a 10% geared buffer with a 1.11 downside multiple.

Raymond James oil picks

The highlight of the week came from Bank of Montreal, which issued a note tied to some of Raymond James & Associates Inc.’s proprietary research in the energy sector. The $41.3 million of zero-coupon oil markets equity-linked notes tied to a basket of stocks chosen by Raymond James suggests that investors continued to bid on research-based notes and that oil remained a popular sector.

It was a delta one structure. The basket included 17 equally weighted stocks such as Basic Energy Services Inc., Bonanza Creek Energy Inc., Chevron Corp., Occidental Petroleum Corp. and Phillips 66.

“It’s an access product. Raymond James is creating access to their own research. In terms of structure, why not? As long as you’re getting good value, transparency and liquidity,” May said.

“Oil is less than half of what it was last summer. All oil stocks are taking a pounding. Are they going to bounce? Maybe they will; maybe they won’t.

“History shows us that nothing stays low forever. They’re buying low. That’s the bet. If they’re right, they’ll make a lot of money. If they’re wrong, they’ll lose a lot. It’s a risky trade, but it doesn’t mean that it’s bad.”

There were no other notable energy deals. But the Bank of Montreal offering was the largest one for the week.

A sellsider said that investments on oil are market-timing bets.

“Goldman Sachs just published a pretty bearish report on oil, calling for WTI to be at $40 in the short term,” he said.

“Having said that, it might be a little bit early, but it’s not a bad idea to start considering investing in oil if you expect companies to recover. The problem is the timing. No one knows if it will happen in a couple of months or in a couple of years.”

Merger flag

Using the research of a top equity research firm in the energy sector is a good idea, in his view.

“It makes sense to invest in oil companies backed by research produced from Raymond James because in this environment, you can expect some mergers. If their stock pickers are good and can identify the right companies, there is definitely some value there,” he said.

Another way to play the Euro Stoxx 50 with less risk is by buying a note linked to a diversified basket of international equity benchmarks, with an overweight on the Euro Stoxx.

Goldman Sachs Group, Inc. priced $40 million of 0% leveraged buffered notes due March 9, 2017 linked to such a basket comprising the Euro Stoxx 50 index with a 37% weight, the FTSE 100 index with a 23% weight, the Topix index with a 23% weight, the Swiss Market index with a 9% weight and the S&P/ASX 200 index with an 8% weight.

The payout at maturity was par plus 1.5 times any basket gain, capped at 21%. The structure offered a 10% buffer with a 1.11 downside multiple beyond the buffer.

The exact same basket has been used several times this year by a variety of issuers, showing an appetite for non-U.S. equity with a strong allocation to the euro zone and Europe, sources said.

More protection

Nearly a third of last week’s notional consisted of defensive structures that offered either a barrier or a buffer, according to the data. The average for the year is 18.75%.

The sellsider offered an explanation: “It might be linked to volatility levels, but the main reason is that we’ve experienced a strong rally in the U.S. market. At this point in time, investors may seek more protection through barriers or buffers,” he said.

“When the strong job report came out on Friday, investors began to worry about the Fed hiking rates sooner than later. The consensus is now for June. Since the Fed has been on easing mode for so many years, the market is a little bit afraid of what’s going to happen next.

“One week doesn’t make a trend, and we still see plenty of notes with full downside exposure. But I think we’re beginning to see a change in mindset.”

The top agent last week was Goldman Sachs with $80 million sold in six deals. It was followed by JPMorgan and BMO Capital Markets Corp.

“The Euro Stoxx works well compared to the S&P.” – Tom May, partner at Catley Lakeman Securities

“The main reason is that we’ve experienced a strong rally in the U.S. market.” – A sellsider on the demand for products with downside protection

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